Diplomatic efforts between Washington and Tehran have long been marked by uncertainty, making it difficult for markets to accurately price geopolitical risks. That fragile outlook was once again brought into focus after President Trump declared on Wednesday that the ceasefire between Washington and Tehran was over, following an overnight escalation in hostilities.
Signaling a hardening stance, President Trump stated that he no longer intends to engage with Tehran, indicating an apparent end to diplomatic engagement, as quoted on CNBC. Following the recent developments, the CBOE Volatility Index (VIX), which reflects market expectations of near-term volatility, surged about 14.69% in the last trading session and about 8.5% over the past five days.
As quoted on the abovementioned CNBC article, Trump's remarks followed renewed hostilities, with both the United States and Iran accusing each other of breaching the ceasefire after fresh strikes overnight. In response to attacks on commercial vessels transiting the Strait of Hormuz on Tuesday, the U.S. military launched a series of retaliatory strikes against Iran.
Separately, the U.S. Treasury Department revoked a waiver allowing Iran to sell its oil, further escalating economic pressure and adding to uncertainty in global energy markets. The developments sent oil prices higher after they had retreated from the peaks reached during the height of the conflict, as shipping activity through the Strait of Hormuz had gradually resumed.
Markets are once again assessing the risk of disruptions in the Strait of Hormuz. Disruptions in the critical waterway could again reverse the recent decline in oil prices and amplify inflationary risks. Both West Texas Intermediate (WTI) crude and Brent crude surged, taking their gains over the past five trading sessions to 7.25% and 7.86%, respectively.
ETFs That Investors Can Consider
Markets have remained highly sensitive to developments in the Middle East, with investors reacting swiftly to geopolitical headlines. Against this backdrop, a conservative investment strategy appears increasingly prudent. The following ETFs could help investors manage risk while taking advantage of opportunities created by heightened market volatility.
Additionally, President Trump's renewed rhetoric on Greenland suggests that geopolitical tensions could remain elevated in the near term. As per another CNBC article, on Wednesday, President Trump reaffirmed his stance that the United States should control Greenland, describing the Arctic island as vital to global security.
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 10.58 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 $486 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 2.84 million shares, SPLV is the most liquid option, offering flexibility for investors implementing short-term portfolio hedges. USMV has gathered an asset base of $23.37 billion, the largest asset base among the other options.
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Get it now >>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).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
