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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.

May 13, 2025 5 min read

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.

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Glossary

Footnotes

Disclosure

Investing involves risk including the risk of loss of principal.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.

Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

Diversification does not ensure a profit or guarantee against loss.

Passive management and the creation/redemption process can help minimize capital gains distributions.

There can be no assurance that a liquid market will be maintained for ETF shares.

While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.

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