With Markets on Edge, Defensive ETFs Deserve a Second Look

Volatility has carried over from 2025 into this year, yet markets continue to climb, seemingly brushing aside growing uncertainty and risk. The S&P 500 is up about 1.7% so far in January, building on the broad market index’s roughly 17% gain last year.

However, that resilience may not last indefinitely. As uncertainty persists, market sentiment could eventually reach a tipping point, prompting a shift toward risk aversion, one that may put renewed pressure on equity markets. Notably, the CBOE Volatility Index has jumped about 15% since last Friday, signaling a move toward risk-off sentiment.

It’s only mid-January, and markets are already contending with rising geopolitical tensions, uncertainty over Fed independence and questions around proposed credit card caps, making increased exposure to defensive funds a prudent investment approach. This reinforces the idea that taking precautions upfront is better than facing avoidable risks later.

Global Flashpoints Are Forcing Investors to Rethink Risk

Recent geopolitical developments paint a picture of prolonged instability, with elevated tensions likely to remain a long-term headwind.

U.S. military actions in Syria and Venezuela, Trump’s renewed focus on acquiring Greenland, even through military means, alongside persistent tensions across the Middle East and Asia’s key flashpoints, highlight an increasingly fragile and complex geopolitical landscape and underscore rising global instability.

The risk of prolonged geopolitical volatility is underscored by rising global defense spending. President Trump’s proposal for a $1.5 trillion U.S. military budget in 2027, alongside projected global defense expenditures topping $3.6 trillion by 2030, which, according to Global X, marks a roughly 33% increase from 2024, reflects how economies are preparing for sustained geopolitical tensions.

The Trump–Powell Tension Refuses to Fade

Trump’s repeated public attacks on Fed Chair Jerome Powell have likely amplified investor concerns. According to JPMorgan Chase JPM CEO Jamie Dimon, as quoted on CNBC, undermining central bank independence could backfire, raising inflation expectations and putting upward pressure on interest rates over time.

Shortly after the Trump administration began a criminal investigation targeting Jerome Powell, BNY BK CEO, Robin Vince, joined Dimon, expressing support for maintaining the independence of the U.S. Federal Reserve, cautioning that undermining central bank independence could have serious negative consequences, as quoted on Reuters.

Credit Card Cap May Backfire on Consumers and the Economy

According to another Reuters article, Jamie Dimon and other top JPMorgan executives have cautioned that Trump’s proposed 10% credit card interest rate cap could seriously harm consumers and the economy, with the industry warning that millions of households could lose access to credit.

ETFs to Consider

Preserving capital and cushioning volatility are key for investors looking to navigate a potentially tumultuous period. Investors should adopt a defensive and conservative investment approach in the near term, as it is better to be cautious than unprepared.

Increasing allocations toward defensive funds may be a prudent strategy, allowing investors to participate in potential upside while still adding protection against elevated volatility. With ETFs offering diversification and tax efficiency, investors can use them to increase exposure to defensive funds.

Below, we have highlighted a few areas in which investors can increase their exposure.

Value ETFs

Value ETFs focus on stocks characterized by strong fundamentals and robust financial health, which trade below their intrinsic value, representing undervaluation. They offer the potential for higher, more stable returns and lower volatility than growth and blend stocks.

Additionally, value ETFs can serve as a source of income through dividends.

Vanguard Value ETF VTV, Avantis U.S. Large Cap Value ETF AVLV and Vanguard Small Cap Value ETF VBR could be appealing options.

Consumer Staple ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can allocate more money to consumer staple funds to safeguard themselves against potential market downturns.

Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.

Quality ETFs

Investors can consider funds like iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ and JPMorgan U.S. Quality Factor ETF JQUA. Amid market uncertainty, quality investing emerges as a strategic response, providing a buffer against potential headwinds.

Volatility ETFs

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 continues.

Investors can also increase exposure to volatility ETFs like iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and ProShares VIX Short-Term Futures ETF VIXY.

ETF Strategies Investors Can Use

Investors may lean more toward stability as risk aversion rises. Adopting passive, long-term strategies, such as buy-and-hold or dollar-cost averaging, could help navigate potential near-term pullbacks while still positioning for sustainable returns over time.

Adopting such strategies can help investors build a resilient portfolio. Both strategies stand out as effective ways to create portfolio momentum and build wealth in the long term, ignoring short-term price fluctuations.

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

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