Economists forecast that President Donald Trump's tariffs will raise prices for domestic consumers and will disrupt global supply chains for multinational corporations. Investors are rightfully repositioning their portfolios for a new political reality.
After two years of roughly 25% gains for the S&P 500, the stock market is facing a different road in 2025, with new challenges this year and beyond.
A study by the non-profit Tax Foundation found that efforts during the first Trump administration "imposed nearly $80 billion worth of new taxes on Americans by levying tariffs on thousands of products." Now consider that the second Trump administration has an even more ambitious plan for the next four years that could have even greater impact as foreign nations retaliate with policies of their own.
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A contentious trade war would have serious consequences for portfolios. But exposure to select sectors could mitigate these challenges. The following investment themes and the exchange-traded funds that express them could help protect risk-averse investors in the years ahead.
All of these ETFs are well-established, with more than $500 million in assets. They're also affordable, with annual expense ratios of less than 0.35%.
Large-cap software
While hardware importers reliant on semiconductors and other components may have a tough road ahead, software stocks are a segment of the tech sector that doesn’t really have much of a physical footprint.
Yes, cloud computing and software giants do need servers somewhere. But existing infrastructure along with deep pockets tend to mitigate that limited exposure to a trade war.
Think stocks like enterprise giant Microsoft (MSFT) or social media titan Meta Platforms (META). They have limited hardware exposure, instead making most of their money from software and the cloud.
Most major tech ETFs tend to be weighted by market value, so tread carefully with technology sector funds as they could include stocks like smartphone leader Apple (AAPL) or chipmaker Nvidia (NVDA) that are very much exposed to the impact of trade wars. The more targeted SPDR S&P Software & Services ETF (XSW) is a good option.
Not only is XSW focused on software and service providers over hardware-focused tech stocks. It's also “equal weight” across roughly 150 total companies to provide a more diversified approach to this investing strategy.
Regional banks
The regional banking sector is a unique part of Wall Street with a clear domestic focus. While megabanks like JPMorgan Chase (JPM) and financial stocks may be titans on Wall Street, they're also very connected to sophisticated global systems.
That includes the East-West dynamic that allows cash flows between Asia and the U.S. as well as investment banking and corporate debt operations that depend on a growth-oriented capital markets environment.
On the other hand, regional banks are operations concerned with local economic activity including mortgage lending, small business loans, and the workaday finance that keeps towns and villages running.
The SPDR S&P Regional Banking ETF (KRE) is the largest and most respected way to play regional banking stocks. The fund has an average market capitalization of less than $7 billion across about 140 holdings that include Truist Financial (TFC) and Citizens Financial Group (CFG).
If you want to play local banks and avoid the complicated nature of big Wall Street banks, KRE provides a close-to-home opportunity for domestic-focused investors.
Utilities
Utilities are one of the most reliable investments on Wall Street, providing safe havens in troubled times. Electricity is a necessity for homes and businesses in the 21st century, so there's always strong baseline demand.
What's more, the sector is highly regulated and very expensive to operate, meaning utility stocks tend to be regional monopolies that don't face true competitive forces.
Even if a trade war does shock the broader global economy, domestic utility stocks and the Utilities Select Sector SPDR Fund (XLU) will be safe and sound. These include leaders in the sector such as NextEra Energy (NEE), Southern Company (SO) and Duke Energy (DUK) that are collectively valued at more than $300 billion.
The icing on the cake is that even if utility stocks are to experience moderate volatility, they are among the most generous dividend stocks out there. Right now, XLU yields 2.9%, more than two times the payout of the typical S&P 500 component.
Investment-grade bonds
If you're particularly interested in yield – or perhaps if you're more pessimistic about the market in general – high-quality bonds are an attractive way to tap into reliable income. While bonds may not provide the same growth potential as stocks, they do offer reliability when things get rough on Wall Street.
Investment-grade bonds – a category that includes debt of government entities as well as blue-chip powerhouses with strong balance sheets – are the top-tier of the debt markets. These are the opposite of "junk" bonds, which are riskier and speculative in nature.
Of course, buying individual bonds requires much more savvy than buying individual stocks. That's why an exchange-traded fund like the Vanguard Total Bond Market ETF (BND) is a good choice.
With more than $120 billion in assets under management and a portfolio of some 18,000 different bonds, the fund yields about 4.6%. It's also full of rock-solid investments such as U.S. Treasury bonds and loans to Wall Street titans like Bank of America (BAC).
Gold
Looking beyond stocks and bonds to alternative assets, gold is often seen as the ultimate safe-haven investment during times of uncertainty. As an uncorrelated asset, the precious metal has the ability to hang tough or even move higher even when the stock market is melting down.
Gold is also a hedge against inflation that is expected to occur if global supply chains are disrupted by trade policies. Just consider that fears over inflationary pressures and a looming trade war have sent gold up more than 40% in the last 12 months
Whether you're looking for a hedge against rising prices or diversification beyond the typical asset classes, the iShares Gold Trust (IAU) is one of the more affordable ways to get direct exposure to gold prices
IAU charges just 0.25% in annual fees, or $25 on $10,000 invested, which is much less than investors might pay to store, insure or transact with physical gold bullion.
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