Trade Tensions Threaten Market Stability: ETF Strategies to Follow

U.S. stocks could fall as much as 11% if trade tensions between the United States and China aren’t resolved before the November deadline, according to Morgan Stanley’s Michael Wilson, per Bloomberg, as mentioned on Yahoo Finance. The firm’s chief U.S. equity strategist said the market may be heading a pullback due to high valuations and high investor exposure.

Unexpected Shock for Investors

U.S. stocks ended sharply lower on Oct. 10, 2025, after President Donald Trump threatened higher tariffs on Chinese goods, accusing Beijing of becoming “very hostile” with new restrictions on rare earth metals -- a vital resource for technology and defense industries, as quoted on CNBC.

Last week, Beijing imposed new export restrictions, requiring foreign companies to obtain a Chinese government license to ship products containing more than 0.1% rare earth content. To obtain the license, foreign companies must disclose the intended use of the products. Most of these restrictions will be in effect from Dec. 1 (quoted on Aljazeera).

Bear-Case Scenario: S&P 500 to Hit 5,800-6,027

Morgan Stanley’s Wilson warned that continued trade uncertainty into November could drive the index down to 5,800-6,027 points — an 8-11% decline from last Friday’s close, as renewed trade tensions emerged as a shocker to many.

ETF Strategies to Play

Against this backdrop, below we highlight a few ETF strategies that can help weather market volatility.

Focus on Dividends

Dividend-paying stocks provide a steady income stream and help mitigate potential losses during weaker market periods. Companies that have the willingness and ability to pay and grow their dividend over time are called dividend aristocrats. Such activities make them quality picks..

In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF VIG is such a pick. 

Seek Refuge in Gold

Gold is considered a unique safe-haven asset. In fact, most precious metals offer some degree of safety. SPDR Gold Trust GLD should be investors’ darlings in this scenario.

Tap Covered Call ETFs to Earn Higher Income & Stave Off Volatility

A covered call strategy is an investing technique that saves one from market selloffs to quite an extent. The strategy involves holding a long position in a stock and selling call options on it to generate extra income. During a selloff, the primary stock position loses value as its price falls, but the premium from call options can partially cushion it.

TappAlpha SPY Growth & Daily Income ETF TSPY yields 13.94% annually. Global X S&P 500 Covered Call ETF XYLD yields 13.09% annually. Global X Nasdaq 100 Covered Call ETF QYLD yields 13.15% annually.

Time for Low-Volatility ETFs?

Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio.

Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets. iShares MSCI USA Min Vol Factor ETF USMV and Invesco S&P 500 Low Volatility ETF SPLV are two such examples in this regard. Both ETFs have a Zacks Rank #2 (Buy).

Invest in Defensive Sectors

Some sectors, such as consumer staples, utilities and healthcare, tend to be less sensitive to economic cycles and more resistant to market volatility. Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF XLP and Utilities Select Sector SPDR ETF XLU intriguing picks.

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