2025 Market Uncertainty? ETFs to Steady Your Portfolio

Escalating geopolitical tensions and the stalling of the decline in U.S. inflation highlight defensive funds as a smart investment choice. According to Liz Ann Sonders, chief investment strategist at Charles Schwab, as quoted on Yahoo Finance, investor sentiment in 2025 is expected to lean heavily toward uncertainty.

Sonders highlighted key economic challenges, such as trade wars, inflation and deportation policies, as reasons for a rise in volatility, prompting investors to adopt a defensive investment strategy.

Tariffs and Deportations May Spike Costs

Many economists warn that President Trump’s primary campaign promises of imposing new tariffs and initiating a "mass deportation" of undocumented immigrants could drive prices upward. These tariffs are likely to derail disinflation efforts, potentially resulting in higher interest rates under the Trump administration (Read: Will Trump's Tariffs Fuel Inflation? ETFs in Focus).

According to Sonders, Trump's mass deportation plans add another layer of complexity, driving up inflationary pressures and hindering economic growth.

With unfavorable trend in inflation, the likelihood of reduced Fed interest rate cuts in 2025 grows. Markets anticipate the Fed skipping the January meeting and potentially cutting rates again in March. Beyond that, market expectations point to just one or two more cuts for the rest of the year, according to CNBC.

Escalating Global Conflicts Threatening Stability

New concerns add to an already tense geopolitical landscape, further complicating the situation. With ongoing tensions around Israel-Gaza war, the collapse of Syria’s Assad regime after 50 years, further complicates the Middle East landscape, weakening investor confidence.

The political challenges in South Korea and France heighten volatility, potentially overshadowing the market rally. President-elect Donald Trump will assume office at the presidential inauguration on Jan. 20, 2025, potentially triggering increased uncertainty in the first half of the year.

ETFs in Focus

Below, we highlight a few ETF areas that investors could use to navigate the uncertain environment in a better way to protect themselves from the potential headwinds in the economy.

Investing in these sectors not only shields investor portfolios from downside risks and safeguards investments during market distress but also offers gains when the broader market trends upward. These sectors provide dual benefits, protecting portfolios during market downturns and offering gains when the market trends upward.

Investors can take a cautious approach by increasing their exposure to these funds.

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response as a potential buffer against potential headwinds. This approach prioritizes identifying firms with robust fundamentals, consistent earnings and lasting competitive strengths. Investing in such high-quality companies can help investors overcome volatility.

Investors can look at funds like Shares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ and JPMorgan U.S. Quality Factor ETF JQUA.

Consumer Staples ETFs

The potential slowdown in the economy could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Additionally, surging household debt levels could burn a significant hole in consumers’ pockets and prove to be a positive for these funds.

Funds like Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK are good options.

Healthcare ETFs

The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.

Investors can consider Health Care Select Sector SPDR Fund XLV, Vanguard Health Care ETF VHT and iShares Global Healthcare ETF IXJ.

Utility ETFs

Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is, thus, considered a defensive investment or a safe haven amid economic turmoil.

Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU and Fidelity MSCI Utilities Index ETF FUTY are some funds that can be considered.

Gold ETFs

Gold, a safe-haven investment during a challenging period, remains a secure choice amid economic and geopolitical instability. As geopolitical tensions escalate, investors can enhance their exposure to the precious metal, to potentially boost portfolio gains and better prepare for an uncertain market environment going forward.

Investors can consider funds like SPDR Gold Shares GLD, iShares Gold Trust IAU and SPDR Gold MiniShares Trust GLDM.

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