US-China Trade Tension Escalates: Should You Seek Refuge in UK ETFs?

The global economy witnessed a dramatic escalation in trade tensions between the United States and China over the past weekend, which rattled the stock market. As the world’s two largest economies have once again come to loggerheads, exchange-traded fund (ETF) investors may shift their focus to ETFs that have heavy exposure to companies based in the UK, as America remains vulnerable to multifaceted economic challenges at the moment.

Before discussing which UK ETFs might be profitable for your portfolio, let’s dig deeper into what happened over the weekend and why UK ETFs might provide you with a safeguard against current market volatility.

A Weekend of Turmoil

The fragile trade relation between America and China that was “seemingly improving” over the past few months has once again suffered a setback after Trump threatened on Friday to impose an additional 100% tariff on Chinese goods, effective Nov. 1, in a direct response to Beijing's earlier move to expand export controls on rare earth minerals.

As one can imagine, this announcement instilled fear of a fresh U.S.-China trade war among investors, sending shockwaves in the global equity markets, with the U.S. President’s single post on the Truth Social Platform of slamming China with a massive tariff increase eroding $2 trillion in equity values in a single trading day (as estimated by Bespoke Investment Group).

Trump’s escalation also provoked a swift reaction from China, with Beijing defending its new export controls on rare earths as a “legitimate” measure and openly announcing that the country will charge U.S. ships for docking at Chinese ports, starting Oct. 14 (as reported by CNBC). This caused the global stock market to plummet further, as investors grappled with anxiety over supply-chain disruption and the rising costs for U.S. manufacturers dependent on Chinese raw materials. In particular, the U.S. stock market suffered the most, with the S&P 500 plunging over 2.7%, its worst drop since April, and the tech-heavy Nasdaq Composite sinking 3.6%.

However, markets found some relief on Sunday evening when President Trump signaled a more conciliatory tone in a social media post, stating the United States "wants to help China, not hurt it" and assuring that "it will be all fine!" This comment helped U.S. stock futures rebound before the bell on Monday, with Nasdaq futures climbing more than 1% (as reported by Yahoo Finance).

Why a Pivot to UK ETFs Might Be the Need of the Hour?

Although a noticeable rebound has been observed in U.S. equity futures, it might not last long as U.S. stocks remain vulnerable, with the threat of further escalation still casting a shadow of uncertainty over market sentiment. American companies, especially in technology, industrials, and clean energy, continue to rely heavily on Chinese supply chains, which means any renewed hostility can spark fresh volatility and erode returns.

The market's "fear gauge," the CBOE Volatility Index (VIX), spiked to 21.66 on Friday, a sharp increase of over 31% from the previous day, reflecting heightened investor anxiety. Although the VIX has plummeted to 19.37 as of the pre-market trading hours on Oct. 13, it remains 18% higher than its Oct. 9 level, confirming continued elevated market volatility.

Beyond the trade war, the U.S. economic landscape remains clouded by the ongoing government shutdown, mounting recession fears and analyst concerns over a looming AI bubble burst. Therefore, a potential disruption in corporate margins and growth prospects has made even diversified U.S.-heavy ETFs vulnerable, to some extent.

Amid this climate of uncertainty, shifting their focus to UK ETFs, which are comparatively stable at the moment, could be a prudent move for global investors. Impressively, the UK market currently offers attractive valuations compared to its U.S. counterpart. While the U.S.-focused iShares Core S&P 500 ETF (IVV) trades at a price-to-earnings ratio of 30.01, the iShares MSCI United Kingdom ETF (EWU) trades at a more modest 18.84, suggesting a potentially safer entry point. This valuation gap, combined with the EWU’s higher dividend yield of 3.68% compared to IVV’s 1.18%, offers investors both income and a potential value opportunity.

Moreover, the UK appears to be actively working to stabilize its own bilateral relationship with Beijing, with the UK and China having held their first Joint Economic and Trade Commission trade talks in seven years, in September 2025. This suggests a comparatively less confrontational stance than Washington, providing a potential shield against extreme market volatility for UK assets.

UK ETFs to Consider

For investors seeking resilience, the following UK ETFs may help shield portfolios against volatility stemming from a fresh U.S.-China trade dispute.

iShares MSCI United Kingdom ETF (EWU)

This fund offers exposure to large and mid-sized companies in the UK. Its top three holdings include U.K-based companies, namely AstraZeneca Inc. (AZN) (9.14%), HSBC Holdings (HSBC) (8.00%) and Shell Plc (SHEL) (7.33%).

EWU has gained 13.4% over the past year. This fund charges 50 basis points (bps) as fees.

Franklin FTSE United Kingdom ETF (FLGB)

This fund offers exposure to the performance of UK large and mid-capitalization companies. Its top three holdings include U.K-based companies — AstraZeneca Inc. (8.48%), HSBC Holdings (7.67%) and Shell Plc (7.14%).

FLGB has gained 13.4% over the past year. This fund charges 9 bps as fees.

First Trust United Kingdom AlphaDEX Fund (FKU)

This fund provides exposure to select stocks from the Nasdaq United Kingdom Index. Its top three holdings include U.K-based companies — International Consolidated Airlines Group S.A. (ICAGY) (2.52%) and Rio Tinto Plc (RIO) (2.45%).

FKU has gained 17% over the past year. This fund charges 80 bps as fees.

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