Is Your Portfolio Ready for a Trade War? ETFs for a Defensive Play

Staying true to his campaign promises, President Donald Trump imposed tariffs on the United States’ largest trade partners — Mexico, Canada and China — resulting in the market reacting negatively. Markets experienced volatile swings as Trump announced 25% tariffs on goods from Canada and Mexico, along with a 10% levy on Chinese imports.

However, the markets rebounded slightly when Trump later announced a one-month pause on tariffs for Mexico and Canada, underscoring that his administration’s tariff policy could lead to continued market uncertainty.

According to Jim Cramer, as quoted on CNBC, investors should brace for more turbulence ahead, with the volatility surrounding new policies expected to stay. Cramer emphasized that Wall Street must recognize Trump’s commitment to fulfilling his campaign promises, even if they hurt the stock market in the short term. He added that Trump firmly believes his tariff plan is key to “making America great again” and won’t back down from that agenda.

Another Trade War Reignited?

China imposed tariffs on U.S. imports in retaliation to new tariffs imposed on Chinese goods, potentially reigniting the trade war between the world’s two largest economies. Per Yahoo Finance, Trump, in his first term as President, launched a fierce two-year trade war with China over its substantial U.S. trade surplus, imposing retaliatory tariffs on hundreds of billions in goods, disrupting global supply.

Additionally, China announced that it is launching an anti-monopoly investigation into Alphabet’s Google GOOG and included U.S. biotechnology company Illumina ILMN on its 'unreliable entities list.'

China’s Commerce Ministry and Customs Administration revealed that the country is imposing export controls on rare earth elements like tungsten, tellurium, molybdenum and indium, which are crucial for the clean energy transition, with China controlling much of the global supply.

According to Yahoo Finance, the likelihood of another trade war has dimmed as the timing of talks between President Trump and Chinese President Xi Jinping has been moved forward.

What Lies Ahead for Investors?

According to Cathy Curtis, a certified financial planner and a member of the CNBC FA Council, as quoted on CNBC, President Trump has repeatedly leveraged tariffs as a negotiating tool, a trend likely to persist. Curtis also advises investors to stay focused on long-term gains rather than overreacting to short-term headlines.

Markets may also face unfavorable inflation data ahead. Additionally, with the Fed keeping interest rates unchanged in their recent meeting in a bid to take a cautious approach and Trump aligning with the decision, marking a sharp turnaround from his previous views on interest rate levels, investors' expectations for lower rates have been tempered, adding to the uncertainty in the market.

According to the CME FedWatch Tool, the Fed has an 86.5% probability of keeping the rates unchanged at 4.25-4.5% in March, while there's a 61.9% likelihood that the Fed may go ahead with a rate cut in June.

Per CNBC, analysts predict a short-term spike in oil prices, higher costs for U.S. consumers, prolonged higher U.S. interest rates and a stronger U.S. dollar, if Trump’s tariffs resume after a 30-day pause.

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.

By investing in these sectors, investors can not only protect their portfolios from potential downturns but also position themselves for gains during market upswings. These sectors offer a dual advantage, shielding investments during times of market distress while capturing growth opportunities when the broader market rises.

For risk-averse investors, boosting exposure to defensive funds and keeping a long-term investment horizon is a smart strategy in these times.

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 the 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.

S&P 500 ETFs

The introduction of tariffs makes one thing clear: President Trump is determined to win. While his policies may bring volatility to international markets and global trade, the U.S. economy stands to benefit in the long run.

Investors can consider SPDR S&P 500 ETF Trust SPY, Vanguard S&P 500 ETF VOO and iShares Core S&P 500 ETF IVV.

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