The unpredictable nature of the U.S.-Iran conflict and the negotiations was once again underscored over the weekend after President Trump warned Iran on social media to “get moving” or risk facing further consequences, sending oil prices higher and reinforcing the elevated volatility theme that has defined 2026.

The CBOE Volatility Index has risen 3.39% over the past five days and 2.26% over the past month, taking its year-to-date gain to 25.19%. As quoted on CNBC, President Trump’s weekend warning to Iran underscored fears that stalled negotiations between Washington and Tehran over a peace deal and access to the Strait of Hormuz may lead to renewed military escalation.

Elevated Energy Costs Fuel Defensive Positioning

Although markets have become less reactive compared to the initial phase of the conflict, rising geopolitical tensions and sharp fluctuations in oil prices continue to keep investors on edge. Trading near the level of $110 per barrel, Brent crude, the global benchmark, has climbed about 1.91% over the past five trading sessions and 21.05% over the past month.

The U.S. benchmark, West Texas Intermediate crude (WTI), trading near the $105 per barrel mark, has added about 3.0% over the past five days and 21.48% over the past month, as per OilPrice.com.

However, the bigger concern for markets is not merely higher oil prices, but the uncertainty surrounding their future direction. Rising oil volatility often creates a broader macro ripple effect, and the oil price uncertainty feeds directly into inflation expectations, complicating the outlook for Fed policy and clouding global growth assumptions. As a result, even modest swings in crude prices can have an outsized impact on investor sentiment.

Disruptions to crude oil supply caused by the closure of the Strait of Hormuz have continued to keep inflationary pressures elevated, contributing to consumer prices rising more than expected in April. The persistent increase in energy costs has also strengthened expectations that the Fed could adopt a more hawkish stance later this year.

According to the CME FedWatch Tool, markets are anticipating a 19% likelihood of interest rates being increased to 3.75-4.0% in its September meeting, significantly up from a 0.7% likelihood just a month earlier. Similarly, the probability of rates reaching that range at the October meeting has surged to 27.7%, compared with only 0.6% a month earlier, per the CME FedWatch tool.

Defensive ETFs to Consider

In an economic environment marked by persistent volatility and uncertainty, conservative investment strategies, including higher allocations to defensive funds, may offer a prudent approach for investors.

Greater exposure to defensive funds offers investors a balanced risk-return profile, allowing participation in potential upside while providing a buffer against heightened volatility. Maintaining a cautious stance may also help mitigate downside risks and support capital preservation during turbulent periods.

In the current backdrop, increasing exposure to defensive funds while maintaining a long-term investment horizon could prove beneficial for investors. Diversification, combined with a disciplined long-term approach, remains essential for navigating uncertainty. Against this backdrop, several areas stand out where investors may consider expanding their exposure.

Consumer Staple ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can allocate more money to consumer staple funds to safeguard themselves against potential market downturns.

Investors can consider Consumer Staples Select Sector SPDR Fund (XLP Quick QuoteXLP - Free Report) and iShares U.S. Consumer Staples ETF (IYK Quick QuoteIYK - Free Report) .

Utility ETFs

As a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil. Investors often turn to utilities during downturns due to the steady demand for these companies' services.

Investors should gain from funds like Utilities Select Sector SPDR Fund (XLU Quick QuoteXLU - Free Report) and iShares U.S. Utilities ETF (IDU Quick QuoteIDU - Free Report) .

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response as a potential buffer against potential headwinds. This approach prioritizes identifying firms with robust fundamentals, consistent earnings and lasting competitive strengths. Investing in such high-quality companies can mitigate volatility for investors. Investors can look at funds like iShares MSCI USA Quality Factor ETF (QUAL Quick QuoteQUAL - Free Report) and Invesco S&P 500 Quality ETF (SPHQ Quick QuoteSPHQ - Free Report) .

ETF Strategies Investors Can Use

Investors may lean more toward stability as risk aversion rises. Adopting passive, long-term strategies, such as buy-and-hold or dollar-cost averaging, could help navigate potential near-term pullbacks while still positioning for sustainable returns over time.

Adopting such strategies can help investors build a resilient portfolio. Both strategies stand out as effective ways to create portfolio momentum and build wealth in the long term, ignoring short-term price fluctuations.