Tariff Uncertainty Still Weighs on Markets: Volatility ETFs to Play

With markets having already priced in a 25-bps rate cut, a significant rally is unlikely unless the Fed delivers a surprise 50-bps cut. Investor sentiment will also depend on Fed Chair Powell’s remarks. However, legal uncertainties around tariffs and the Supreme Court’s upcoming ruling could weigh on sentiment and trigger a negative market reaction.

Wall Street is likely to face added economic uncertainty, with the Supreme Court set to decide on the legality of tariffs introduced by the U.S. President under the International Emergency Economic Powers Act (IEEPA), which could also heighten concerns over the economy’s fiscal health.

According to Rob Arnott, chairman of Research Affiliates, as quoted on Reuters, reversing the tariffs would create significant uncertainty and markets tend to react negatively to increased uncertainty.

Even if the Supreme Court strikes down the tariffs, per reports from Goldman Sachs and Morgan Stanley, as quoted on the Reuters article, the administration is likely to use alternative measures to focus on particular trading partners or sectors. Still, this does not rule out a rise in investor caution or heightened nervousness in the markets.

Uncertainty Clouds the Corporate Space

A ruling against the tariffs may result in companies seeing a significant one-time boost. However, some strategists, according to the abovementioned Reuters article, caution that this potential boost might be offset by increased uncertainty and the likelihood of further political and legal challenges.

Per BCA Research chief U.S. strategist Doug Peta, as quoted on Reuters, companies could delay capital spending and put hiring on hold, which, according to Peta, could ultimately lead to U.S. stock indexes to retreat from the recent record highs.

Not only are companies likely to encounter more uncertainty, but the country’s fiscal health could also deteriorate if the court rules against the tariffs.

ETFs to Explore

In periods of rising uncertainty, increasing exposure to volatility ETFs in the short term can be a winning move for investors. These funds have delivered short-term gains during periods of market chaos and may climb further if volatility endures.

In the current economic environment, volatility-focused funds and strategies are ideal for reassessing volatility exposure for investors with a short-term horizon.

Given the chances of heightened volatility due to the ongoing legal uncertainty over tariffs, adding these ETFs may be a smart strategic move (See: all Volatility ETFs here).

iPath Series B S&P 500 VIX Short-Term Futures ETN VXX

iPath Series B S&P 500 VIX Short-Term Futures ETN seeks to track the performance of the S&P 500 VIX Short-Term Futures Index Total Return and has amassed an asset base of $971.3 million. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts.

iPath Series B S&P 500 VIX Short-Term Futures ETN charges an annual fee of 0.89% and has a one-month average trading volume of 6.88 million shares.

ProShares VIX Short-Term Futures ETF VIXY

ProShares VIX Short-Term Futures ETF seeks to track the performance of the S&P 500 VIX Short-Term Futures Index and has amassed an asset base of $332.4 million. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future.

ProShares VIX Short-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. VIXY has a one-month average trading volume of 1.92 million shares. The fund charges an annual fee of 0.85%.

ProShares VIX Mid-Term Futures ETF VIXM

ProShares VIX Mid-Term Futures ETF seeks to track the performance of the S&P 500 VIX Mid-Term Futures Index and has amassed an asset base of $43.7 million. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for VIX five months in the future.

ProShares VIX Mid-Term Futures ETF has a one-month average trading volume of about 124,000 shares. The fund charges an annual fee of 0.85%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research