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AI Optimism on Pause? ETFs to Play in the Short Term

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Questions about whether an AI-driven bubble is forming have been around for some time, contributing to periods of increased caution among investors. Growing concerns over elevated debt levels among AI-focused companies, particularly those tied to AI infrastructure, have weighed on broader market sentiment, as per CNBC.

The S&P 500 and the Nasdaq Composite slipped about 0.16% and 0.59%, respectively, on Monday. In comparison, the CBOE Volatility Index has climbed roughly 14% since Dec. 12, underscoring the recent increase in market volatility and investor concern.

This backdrop underscores the need for investors to sharpen their focus on short-term portfolio positioning, where increasing exposure to volatility and option income ETFs stands out as a compelling strategy.

The Short-Term Case for These ETF Picks

Markets remain divided over whether an AI-driven bubble is taking shape, keeping investor sentiment fragile and risk appetite subdued. Against this backdrop, increasing exposure to these funds as a short-term allocation can help hedge potential downside, offering a compelling option for both investors who are cautious about AI excesses and those who remain confident in the theme’s long-term potential.

Why Volatility ETFs?

Increasing exposure to volatility ETFs in the short term can be a winning move for investors. Taking precautions upfront is better than facing avoidable risks later. These funds have delivered short-term gains during periods of market chaos and may climb further if volatility continues.

Investors with a long-term horizon may be able to look past these near-term uncertainties. Still, in the current economic environment, volatility-focused funds and strategies are ideal for investors with a short-term horizon who are reassessing volatility exposure.

With the potential for increased volatility, adding these ETFs may be a smart strategic move (See: all Volatility ETFs here).

Investors can consider iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) , ProShares VIX Short-Term Futures ETF (VIXY - Free Report) and ProShares VIX Mid-Term Futures ETF (VIXM - Free Report) .

Why Option Income ETFs?

Option income ETFs typically employ covered call strategies, where the fund holds a portfolio of stocks and sells call options on those holdings to generate income. The premiums collected from selling these options are then distributed to shareholders in the form of dividends. The trade-off is that while this strategy generates cash flow, it can cap the fund's upside potential because the call options may limit gains when underlying stocks rally strongly.

Interest in these funds has surged in 2025 as investors look to stay invested in equities while seeking more predictable returns amid heightened market uncertainty.

Investors can consider JPMorgan Nasdaq Equity Premium Income ETF (JEPQ - Free Report) , JPMorgan Equity Premium Income ETF (JEPI - Free Report) , Global X S&P 500 Covered Call ETF (XYLD - Free Report) and Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report) .

What Long-term Investors Should Focus On

For long-term investors, increasing exposure to diversified, less concentrated ETFs can offer a more stable path forward. Pairing this with strategies like buy-the-dip, dollar-cost averaging, and a disciplined buy-and-hold approach can make it easier to navigate short-term market volatility while staying focused on long-term goals ( Read: ETFs to Keep Your Portfolio on Track in the Long Term).

Importantly, several major financial institutions have raised their year-end forecasts for the S&P 500, largely driven by continued growth in the AI market and strong AI-driven earnings growth. As a result, completely stepping away from the AI theme may not be prudent.

Diversification becomes especially critical when investing in transformative themes like AI. By spreading investments across multiple sectors and funds, investors can capture the upside of the AI rally while avoiding the pitfalls of overconcentration (Read: Capturing AI Gains Without Overexposure: ETFs to Consider). 

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