The U.S. market, which is already navigating a volatile and uncertain 2025, now faces the risk of more instability as the rising likelihood of U.S. involvement in the Iran-Israel conflict further amplifies uncertainty and market volatility.
This week, the S&P 500 Index fell about 0.8% as of Wednesday. If the United States joins the conflict in the Middle East and disruptions to the global oil supply chain intensifies, the S&P 500 Index could face further downside pressure.
According to RBC Capital Markets, as quoted on Business Insider, a direct U.S. involvement or a major disruption in global oil supply could potentially drive the S&P 500 down by as much as 20%.
What Could a Direct Involvement Mean?
The prospect of direct U.S. involvement only increases the risk of market turmoil and economic disruption, resulting in a sharp sell-off in the financial markets. The renewed conflict in the Middle East adds to existing investor concerns, as markets continue to deal with the economic fallout from President Trump’s tariff policies and their impact on global trade.
According to a Wall Street Journal report, as quoted on Reuters, President Trump approved military strike plans against Iran in a meeting with senior aides late Tuesday but held off on issuing a final order, further assessing the escalation.
Per Business Insider, the escalation in the conflict could dent both investor and business sentiment in the United States, weighing on economic activity and market confidence. According to the Conference Board’s latest survey, as quoted on Business Insider, CEO confidence fell to its lowest level in nearly three years during the second quarter.
As per RBC, citing its analysis of call transcripts, mentions of geopolitics and war are becoming prominent in recent corporate earnings calls. Disruptions in the global oil supply chain could reignite inflation in the world’s largest economy.
ETFs to Explore
Below, we highlight a few funds that investors may consider to potentially capitalize on market movements if the United States gets involved in the conflict.
Consumer Staples ETFs
Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from the potential market downturn.
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
Amid market uncertainty, quality investing emerges as a strategic response, providing a potential buffer against the potential headwinds. This approach prioritizes identifying firms with robust fundamentals, consistent earnings and lasting competitive strengths. Investing in such high-quality companies can mitigate volatility for investors.
Investors can look at funds like iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ and JPMorgan U.S. Quality Factor ETF JQUA.
Aerospace and Defence ETFs
Escalating geopolitical tensions and the likelihood of the United States joining the conflict in the Middle East give a significant boost to the U.S. Aerospace – Defense Industry. The S&P 500 Aerospace and Defense index has gained 39.36% over the past year and 2.73% month to date.
In such an environment, investing in Aerospace and Defense ETFs may offer a strategic advantage, as these funds tend to perform well during periods of heightened military activity and increased defense spending.
Investors can consider iShares U.S. Aerospace & Defense ETF ITA, Invesco Aerospace & Defense ETF PPA and Global X Defense Tech ETF SHLD.
Invest in Greenback
Investors may consider increasing their exposure to the U.S. dollar, given the likelihood of an appreciating greenback and investors turning toward safe-haven assets. Per Trading View, the U.S. Dollar Index (DXY) has gained 1.19% over the past five days and 9.56% year to date.
Investors can look at funds such as Invesco DB US Dollar Index Bullish Fund UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.
Volatility ETFs
In periods of rising uncertainty, 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 could climb further if volatility endures (Read: Play Short-Term Market Volatility With These ETFs).
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.
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
