US Government Shutdown Puts These ETFs in Focus

The U.S. federal government shut down early on Oct. 1, 2025, after last-minute talks between lawmakers and President Trump failed. On Tuesday night, the Senate rejected both a Republican and a Democratic funding plan. With no compromise made, a funding lapse became unavoidable. This marks the first shutdown since the record-breaking 2018-19 deadlock, which lasted seven weeks during Trump’s first term, as quoted on Yahoo Finance. 

Is There Any Economic Fallout?

Government spending has been halted, and key data — starting with Friday’s jobs report — will be delayed. This may keep corporates from understanding the economic standing properly and taking timely business decisions. Effects may be less severe if the shutdown ends soon.

The longest shutdown ever — 35 days in 2018-19 — cut only 0.4% from total economic output, as quoted on an NBC News article. The article went on to highlight that in the 2013 government shutdown, about 40% of all civilian employees were furloughed. A similar outcome this time could slash U.S. economic growth by about 0.15% each week.

S&P 500 to Stay Safe?

In the long run, shutdowns tend to have a limited impact on markets. According to Jacob Falkencrone, Saxo Bank’s global head of investment strategy, the S&P 500 has historically gained about 12% on average in the 12 months following the past shutdowns, as quoted in the above-mentioned NBC News article. In 2018-2019, the S&P 500 index advanced more than 10% during that shutdown, the article mentioned.

ETF Impact

Against this backdrop, below we highlight a few exchange-traded fund (ETF) areas that could be in the spotlight for the short term.

Treasuries – iShares 20+ Year Treasury Bond ETF TLT

Investors often flock to Treasuries as a safe haven. However, several rating agencies have raised questions about the U.S. credit health in the recent past and downgraded ratings. A U.S. government shutdown could hurt the country's credit, rating agency Moody's said in late September, as quoted on Reuters.

Consumer Discretionary – Consumer Discretionary Select Sector SPDR XLY

Federal worker furloughs and late paychecks may weigh on consumer spending. This, in turn, may hurt ETFs like XLY in the short term.

Financials – Financial Select Sector SPDR XLF

The U.S. SEC will halt most of its activities amid the government shutdown. Thus, a shutdown should delay SEC approvals in various corporate activities lke IPO and M&A. This, in turn, may hurt ETFs like XLF, as their investment banking activities may hit a bump in the short term.

Healthcare – The Health Care Select Sector SPDR Fund XLV

Healthcare is often seen as a defensive play during periods of broader market uncertainty. Healthcare services, pharmaceuticals, and medical devices normally see stable demand due to their non-cyclical nature.

Consumer Staples – Invesco S&P SmallCap Consumer Staples ETF PSCC

This is another sector, which is safe and non-cyclical in nature. The sector is normally not dependent on government contracts and sees steady demand. 

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

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