Versatility Unbound: Using ETFs as Risk Management Tools
Volatility happens. Markets move, policies change, and unexpected events are on the horizon. In a world this unpredictable, agility is key. ETFs are adaptive tools that can help investors build more resilient portfolios no matter what the future holds.
ETFs: A Modern Approach to Risk Management
Uncertainty breeds volatility. But it also propels innovative thinking, ingenuity, and the adoption of resilient strategies. While no investment can totally eliminate risks, ETFs have potential structural advantages to help you manage them (Figure 1).
Figure 1: Potential Structural Advantages of ETFs
| Feature | Benefit |
| Diversification | ETF holdings are able to span across asset classes, geographies, sectors, and factors, reducing concentration risk and smoothing out returns over time. |
| Liquidity | ETFs trade on exchanges like stocks, and they also offer an added layer of liquidity thanks to their unique creation and redemption process. This enables market makers to adjust supply in response to demand, helping stabilize prices even in volatile conditions. |
| Execution | Unlike mutual funds, ETFs offer intraday trading, allowing investors to react to market events in real time instead of waiting for end-of-day windows. |
| Hedging | ETFs simplify defensive strategies, such as tactically allocating to gold to hedge against inflation and geopolitical risks. |
| Cost Efficiency | ETFs generally have lower expense ratios and allow for more efficient tax management — for instance, the median expense ratio for ETFs (0.44%) is less than half that of mutual funds (0.92%).1 |
| Transparency | Most ETFs, with the exception of some active funds, disclose their holdings daily. This gives investors transparency into portfolio composition and risk exposure |
| Access | ETFs can open the door to investment opportunities and asset classes that have been traditionally harder to access, such as private markets, commodities, crypto or digital assets, and hedge fund strategies. |
Using ETFs to Adapt to Market Movements and Macro Shifts
As inflationary pressures began to ease in 2024, central banks cut rates and equity markets reached new highs. Still, uncertainty persisted into 2025.
Now, volatility and inflation concerns are back due to geopolitical tensions, trade policy uncertainty, and continued global fragmentation.
To manage macro shifts and prolonged uncertainty, more investors are rifling through their toolboxes and pulling out ETFs for strategic and tactical uses — whether adjusting duration in fixed income portfolios, diversifying beyond traditional 60/40 stock-bond allocations, or tactically responding to macro-driven opportunities.
Figure 2: How ETFs Help Manage Risk Amid Rates, Infation, and Geopolitical Uncertainty
| Interest Rate Cycles | In rate-hiking environments, investors have historically rotated into short-duration bond ETFs to minimize interest rate risk. Conversely, when rate cuts are imminent, longer-duration bonds become more attractive for capital appreciation. Three rate cuts appear probable by December 20252 — which may prompt investors to re-evaluate their duration exposures as the Fed’s easing cycle unfolds. |
| Inflation Hedging | Commodities like gold and real assets have historically served as hedges against inflationary pressures. For instance, as inflation has risen, central banks have purchased 3,176 tonnes of gold since 2022.3 This spike in demand, coupled with ongoing geopolitical instability, accentuates gold’s role as a strategic, long-term tool for managing risk. |
| Geopolitical Tensions | Tariffs, fiscal uncertainty, and military conflicts are potential strains on global commerce. ETFs tracking potential safe-haven assets (e.g., Treasurys, gold) may prove to be a useful hedge, as investors seek ways to counter heightened volatility on multiple fronts. |
How Investors Think About Risk and What They’re Doing About It
In our 2025 ETFs in Focus Study: Risk Management Attitudes and Behaviors, we zeroed in to see how investors view risk today: what they perceive as the biggest threats to portfolios, how they manage those risks, and how confident they feel about their strategies.
What’s Keeping Investors Up at Night?
In 2025, the top concerns among investors surveyed are trade wars/tariffs (44%), recession (37%), unexpected inflation (34%), and market volatility (34%).
Trade wars and tariffs dominated conversations in early 2025. These results highlight how retail investors — and their portfolios — are vulnerable to headline risk.
Investor sentiment can shift rapidly based on the latest news cycle. Staying diversified and focused on the long-term can help investors avoid reactionary decision-making.
How Investors Are Managing Risk
Being aware of risk is one thing, acting on it is another. Our study found that managing risk is nearly universal, with only 9% of respondents saying they don’t plan around it. And, investors are employing a variety of risk management tactics — namely, avoiding high-risk investments (45%), diversification (45%), and holding cash and cash equivalents (36%).
Confidence in Risk Management Strategies
Are these strategies working? We asked investors to rate their confidence in their current risk management approach. The majority of respondents were confident (57%), while only a small percentage were not (7%).
Confidence in risk management was closely tied to both professional guidance and portfolio size. Only 50% of self-directed investors feel secure in their approach, compared to 66% of those working with an advisor. Similarly, just 48% of investors with US$25k–$249k in assets express confidence, while that number rises to 65% for those with US$250k or more.
Professional advice, or perhaps more experience in the market, could potentially make a significant difference when it comes to navigating risk and making disciplined investment decisions.
A Landscape Riddled with Uncertainy — and Opportunity
In Q1 2025, volatility returned in full force, and many investors are navigating the uncertain environment with a sharper eye. ETFs continue to stand out as investors use them to lean in, lean out, hedge, or hold steady. They’re turning to ETFs to add resiliency and optionality to their portfolios, preparing for whatever the future may bring.
Are You Ready for the Road Ahead?
Uncover the top ETF trends, market shifts, and bold forecasts shaping tomorrow — and what it takes to build resilient portfolios for the future with our ETF Impact Report 2025-2026.