How to Trade the Ups and Downs of the S&P 500 With ETFs

The S&P 500 achieved a record high and staged a remarkable rebound in 2025, following a tumultuous spring. The rally was driven by artificial intelligence, trade optimism, strong corporate earnings and easing inflation. 

The solid trend continued in the first week of the second half with trade deals and a better-than-expected jobs report buoying investors' sentiments. Trump’s new trade deal with Vietnam has improved market sentiment, raising hopes for additional agreements. The United States has also eased export restrictions on chip design software to China, signaling a possible easing in U.S.-China trade tensions (read: 5 U.S. Equity ETFs Gaining Investors' Love at the Start of 2H).  

However, the return of tariff talks is weighing on sentiments once again this week.

Factors Driving Up S&P 500

Big Tech continues to dominate market gains. Mega-cap firms like Microsoft, NVIDIA, Alphabet and Apple have extended their AI investments, driving optimism about productivity growth and future earnings. NVIDIA, in particular, remains a market darling, with demand for GPUs and AI chips far outstripping supply.

The U.S. economy has shown surprising resilience amid shifting trade policies and global tensions. Additionally, Federal Reserve Chair Jerome Powell signaled a more accommodative stance during his June meeting, hinting that interest rate cuts could arrive later in the year. The central bank’s shift from a hawkish to dovish tone reassured investors that monetary policy would support the recovery.

Wall Street Analysts Growing More Bullish

Wall Street strategists are growing more optimistic about stocks, even as renewed trade tensions cloud the economic outlook. Goldman Sachs (GS) raised its year-end S&P 500 target to 6,600 from 6,100, citing deeper-than-expected Federal Reserve rate cuts, lower bond yields, and investors’ growing willingness to look beyond short-term earnings weakness. Bank of America (BAC) lifted its forecast to 6,300 from 5,600.

Downside: Trade Tensions Heat Up Again

Trump reignited global trade tensions by threatening new tariff rates, ranging from 25% to 40% on more than a dozen countries starting Aug. 1. The United States will impose 25% tariffs on goods from South Korea and Japan from Aug. 1, while also imposing steep import duties on other nations by next month.

Trump also warned BRICS countries could be hit with an extra 10% tariff, accusing the group of trying to harm the United States and weaken the U.S. dollar. 

Deals with the UK, Vietnam and China offer some optimism, but major negotiations with the EU, Canada and others remain unresolved. Failure to reach agreements could trigger a new round of tariffs, threatening market sentiment and consumer confidence. The tariff anxiety is also expected to hit consumer behavior and spending plans.

Moreover, Trump said he would impose a 50% tariff on copper imports to the United States and threatened duties as high as 200% on pharmaceutical imports.

How to Trade

While AI momentum and a resilient economy will support the S&P 500 rally, near-term volatility is likely to persist given Trump’s renewed tariff threat. Given the abrupt changes in the S&P 500 and an uncertain outlook, investors should place their bets on ETFs tracking this index cautiously or take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.

S&P 500 ETFs

The ETFs that track the S&P 500 Index include SPDR S&P 500 ETF Trust SPY, iShares Core S&P 500 ETF IVV, Vanguard S&P 500 ETF VOO and SPDR Portfolio S&P 500 ETF SPLG (read: S&P 500 ETFs Up 6% This Year: What Lies Ahead?).

Leveraged ETFs

Leveraged ETFs might be a good option for those seeking huge gains in a short time frame compared to simple products. These include ProShares Ultra S&P500 ETF SSO, Direxion Daily S&P 500 Bull 3x Shares SPXL, ProShares UltraPro S&P500 ETF UPRO and Direxion Daily S&P 500 Bull 2x Shares SPUU. These funds aim to return two times (2x) or three times (3x) the daily performance of the S&P 500 Index.

Inverse ETFs

Investors who are bearish on the index may consider a near-term short with these ETFs, namely, ProShares Short S&P500 SH, ProShares UltraPro Short S&P500 SPXU, ProShares UltraShort S&P500 SDS and Direxion Daily S&P 500 Bear 3X Shares SPXS. These funds aim to offer two to three times the inverse daily performance of the S&P 500 Index.

Direxion Daily S&P 500 Bear 1x Shares SPDN seeks to provide inverse exposure to the S&P 500 without leverage. 

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