Optimism surrounding a potential peace deal between Washington and Tehran strengthened over the weekend after President Trump stated that the United States and Iran were close to finalizing a memorandum of understanding aimed at reopening the Strait of Hormuz. The comments initially boosted hopes that easing geopolitical tensions could help stabilize global markets.
However, the path toward a lasting agreement once again appeared uncertain after reports emerged that U.S. and Israeli aircraft struck Iranian vessels and additional targets in the Strait of Hormuz. While markets had earlier absorbed the initial shock from the Middle East conflict, investor sentiment is now increasingly being driven by the uncertainty surrounding whether a durable peace agreement can ultimately be achieved.
This volatile backdrop highlights the importance of adopting a more conservative and defensive approach to portfolio positioning, with increased exposure to volatility and low-volatility ETFs to help hedge against downside risks, particularly while the prospects of a conclusive and lasting agreement between the two sides remain uncertain.
U.S. Central Command (CENTCOM) stated that American forces targeted Iranian missile launch sites and boats attempting to place mines in the Strait of Hormuz, as quoted on Yahoo Finance. CENTCOM spokesperson Captain Tim Hawkins described the strikes as defensive measures aimed at protecting U.S. troops from threats posed by Iranian forces, as quoted on the abovementioned article.
CNBC reported that Iran’s Islamic Revolutionary Guard Corps warned of retaliation against any ceasefire violations after detecting and engaging U.S. drones and an F-35 fighter jet that allegedly entered Iranian airspace. Meanwhile, peace negotiations became more complicated after President Trump said on Monday that he had urged several Middle Eastern nations to join the Abraham Accords with Israel.
ETFs That Investors Can Consider
With the prospects of a lasting peace deal still complicated and elusive, the following funds may offer ways to navigate both market risks and opportunities.
Volatility ETFs for Navigating Risks
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. Increased exposure to volatility ETFs is emerging as a compelling strategy, not only as a hedge against potential short-term downside risks but also as a way to benefit from lingering market uncertainty.
Investors can consider iPath Series B S&P 500 VIX Short-Term Futures ETN VXX, ProShares VIX Short-Term Futures ETF VIXY and ProShares VIX Mid-Term Futures ETF VIXM.
With a one-month average trading volume of 8.31 million shares, VXX is the most liquid option, offering investors easier entry and exit, making it well-suited for tactical positioning and short-term hedging strategies in the current volatile economic backdrop.
VXX has gathered an asset base of $560.2 million, the largest asset base among the other options. Regarding charging annual fees, VIXY and VIXM are the cheapest options, charging 0.85%.
Low-Volatility ETFs to Help Steady Your Portfolio
Low-volatility ETFs seek to provide a smoother investment experience by focusing on stocks that historically exhibit lower levels of market volatility. These funds commonly favor defensive sectors, including healthcare, utilities and consumer staples, where earnings and demand tend to remain more stable during uncertain periods. This makes them attractive for investors looking to balance market exposure with downside protection.
Investors can consider iShares MSCI USA Min Vol Factor ETF USMV, Invesco S&P 500 Low Volatility ETF SPLV and iShares MSCI EAFE Min Vol Factor ETF EFAV.
With a one-month average trading volume of 2.38 million shares, SPLV is the most liquid option, offering flexibility for investors implementing short-term portfolio hedges. USMV has gathered an asset base of $23.04 billion, the largest asset base among the other options.
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iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports
iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports
iShares MSCI EAFE Min Vol Factor ETF (EFAV): ETF Research Reports
Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports
ProShares VIX Mid-Term Futures ETF (VIXM): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).