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Key Points
- With oil prices rising and the market potentially poised for an accelerating selloff amid the Iran war, defensive ETFs can help to provide a multi-pronged hedge against turbulence.
- TAIL provides protection against downside risk in the S&P 500, while KMLM uses liquid futures contracts on commodities, currencies, and bond markets as a defense.
- FLTR's strategy involves short-duration, floating rate investment-grade corporate bonds to provide meaningful yield even in challenging inflationary environments.
- Special Report: Do this before SpaceX IPOs or be sorry
Though oil prices have not yet climbed to the extremes some analysts predicted, a sharp spike in the early days of the Iran war has pushed pump prices higher and contributed to a roughly 3.5% selloff in the S&P 500 over the past month. Many retail investors built portfolios assuming calm conditions that favor traditional equities, so further geopolitical shocks could leave portfolios poorly protected.
Fortunately, there are accessible exchange-traded funds (ETFs) that may help absorb some of that risk. Investors who anticipate more market turbulence as the conflict continues may consider rebalancing to add one or more of the following funds, each designed to perform in stressful market environments.
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%). The fund seeks to limit downside risk by combining out-of-the-money put options on the S&P with U.S. Treasurys for income potential. It functions like an insurance policy for an equities portfolio, tending to gain value during sharp market selloffs.
Year-to-date, the fund has outperformed the broader market — returning close to 3% while the S&P 500 is down about 3.4% over the same period — which may illustrate how its strategy can pay off during turbulence. The Treasury component can also benefit when investors flee to government debt, and the fund currently pays a dividend yield of 2.1%.
TAIL is not ideal as a pure buy-and-hold core holding, largely because of its higher expense ratio and the possibility that its strategy could be less effective if many similar tail-hedge products proliferate. Still, it can be a useful tactical hedge during periods of elevated volatility.
A Multi-Pronged Hedge Using Managed Futures
The KraneShares Mount Lucas Index Strategy ETF (NYSEARCA: KMLM) targets an index of 22 liquid futures contracts trading on U.S. and international exchanges, spanning commodities, currencies and bond markets. As a managed-futures fund, it aims to provide returns that are uncorrelated with traditional equities and bonds, helping to hedge across multiple asset classes.
KMLM has demonstrated strong performance in stress environments — for example, in 2022, when both the S&P 500 and the U.S. Aggregate Bond Index were sharply negative, the ETF returned close to 30%. With oil prices rising, inflation edging higher, and bond markets challenged by shifting interest-rate expectations, the current environment could resemble that backdrop.
The fund also offers a dividend yield of 4.7% and has outperformed YTD, returning about 7% so far in 2026. Like TAIL, KMLM carries a higher expense ratio (0.90%) and can underperform during calmer market periods, so it is often best used tactically rather than as a core long-term holding.
Floating-Rate Bonds Provide Competitive Yields in Difficult Environments
The VanEck Investment Grade Floating Rate ETF (NYSEARCA: FLTR) invests in investment-grade floating-rate notes that periodically reset with market rates. That structure reduces duration risk — a major concern for many bond investors when inflation or rates rise — and can provide competitive yields that increase as rates move higher.
With inflation again a growing concern amid rising oil and shipping costs, fixed-rate bond funds may face pressure as rate expectations shift upward. FLTR can help convert that risk into additional income because its holdings reset to prevailing rates.
Featuring a low expense ratio (0.14%) and a dividend yield of 4.9%, FLTR is arguably the most conservative of the three funds, appealing to investors seeking income with lower sensitivity to rising rates.
Each of these ETFs offers different potential benefits: TAIL for tail-risk protection, KMLM for uncorrelated managed-futures exposure, and FLTR for floating-rate income. Investors may choose one or combine them to create a multi-layered hedge against potential market shocks stemming from the war. As always, consider your risk tolerance, time horizon and costs before reallocating.
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