Though oil prices have not yet climbed to the levels that some analysts have predicted, a sharp spike in the early days of the Iran war has nonetheless caused increases at the pump and contributed to a 3.5% selloff of the S&P 500 in the last month. As most retail investors have built their portfolios with the assumption of calm conditions that favor traditional equities, there is a risk that investors may find themselves unprotected if the geopolitical situation sends further shockwaves through markets.
Fortunately, there are accessible exchange-traded funds (ETFs) that may help absorb some of that potential shock. Investors anticipating further market turmoil if the war continues and escalates may consider rebalancing to add one or more of the following funds that are designed for this type of scenario.
A Tail Risk Hedge That Offers Protection When Equities Plunge
First up is the Cambria Tail Risk ETF (BATS: TAIL), an actively managed fund with a relatively high expense ratio (0.59%) that reflects this structure. The fund aims to limit downside risk in the market by combining "out of the money" put options on the S&P with U.S. Treasurys for income potential. It acts as a sort of insurance policy for an equities portfolio, gaining value during sharp selloffs in the broader market.
The fund has outperformed the broader market year-to-date (YTD), providing returns of close to 3% while the S&P 500 is down 3.4% over the same period. Investors may see this as proof that the fund's strategy can indeed pay off during turbulence. At the same time, the Treasury bond component may also benefit when investors seek refuge from markets in government debt, while also providing income potential. TAIL pays a dividend yield of 2.1%.
This fund is not ideal as a buy-and-hold option, mostly because of its high expense ratio.
It may also be unable to execute its strategy as effectively if other tail-hedge options proliferate. However, its recent success may point to its continued potential during a highly volatile time.
A Multi-Pronged Hedge Using Managed Futures
The KraneShares Mount Lucas Index Strategy ETF (NYSEARCA: KMLM) targets an index of 22 liquid futures contracts that trade on both U.S. and international exchanges, including a combination of commodities, currencies, and bond markets. As an uncorrelated fund, this managed futures approach may help hedge risk across equities, bonds, and commodities.
KMLM has a track record of success, including in 2022 when the S&P 500 and the U.S. Aggregate Bond Index had a sharply negative year, and the ETF returned close to 30%.
With oil prices surging, inflation picking back up, and bonds facing challenges related to interest rates and more, the environment in 2026 may be similar.
With a dividend yield of 4.7%, KMLM also appeals for its passive income benefit.
Like TAIL above, KMLM has outperformed YTD, with 7% in returns so far in 2026.
And also like TAIL, this fund is not ideal for a long-term position in a portfolio because of its high expense ratio (0.90%) and its weaker performance during periods of market calm—but it may be well-suited for the continued uncertainty in the current moment.
Floating-Rate Bonds Provide Competitive Yields in Difficult Environments
Employing a strategy involving investment-grade floating rate notes, the VanEck Investment Grade Floating Rate ETF (NYSEARCA: FLTR) has a portfolio of bonds that can reset periodically along with market rates. The result is a fund with competitive yields and lacking duration risk that can become a significant issue for many bond investors amid periods of rising inflation.
Inflation is once again a growing concern for investors, with oil prices rising and shipping costs expected to escalate across many categories of goods.
In this scenario, fixed-rate bond funds face pressure while rate expectations move higher. On the other hand, FLTR can help to translate inflation risk into additional income thanks to a rising yield.
With an expense ratio of just 0.14% and a dividend yield of 4.9%, FLTR could be called the most conservative of the three funds, appealing to investors keen to avoid risk amid uncertainty.
However, all three of the funds provide different potential benefits and protection and may successfully be used in combination to form a multi-layered protection against potential futures shocks due to the war.
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The article "3 ETFs That Could Cushion Your Portfolio From War Risk" first appeared on MarketBeat.
