It has been a roller-coaster week for the markets. Stocks initially rallied following the Democratic Party's sweeping midterm election victory, only to face renewed selling pressure amid concerns over increased scrutiny of AI investments and potential regulatory headwinds. The sharp sell-off on Thursday erased trillions of dollars in market value, highlighting the fragility of investor sentiment and reinforcing concerns about downside risks.

On Thursday, the Nasdaq Composite fell approximately 5.5%, entering correction territory, extending its losses to roughly 5% over the past five trading sessions and 12% over the past month.

According to a Reuters article, the tech-heavy Nasdaq Composite recorded its steepest single-day decline since the April 2025 tariff-driven sell-off, as concerns surrounding the AI investment boom and its sustainability came under increasing scrutiny in recent weeks. Analysts have cautioned that the magnitude of recent losses could leave markets vulnerable to further selling pressure, reinforcing concerns about a prolonged period of volatility.

The U.S. equity market has increasingly become top-heavy, leaving the S&P 500 heavily exposed to the technology sector. The broad market index fell approximately 4.4% on Thursday, extending its losses to around 5.8% over the past month and nearly 5% over the past three months.

The CBOE Volatility Index (VIX), which reflects market expectations of near-term volatility, offers a useful gauge of the recent rise in market uncertainty. The volatility index has climbed approximately 49% over the past five trading sessions, bringing its gains to around 80.1% over the past month and 85% year to date.

What Should Investors Do?

Protecting portfolios against downside risks becomes particularly important during periods of heightened market uncertainty. While increasing exposure to defensive investments can help investors navigate market downturns, rising volatility can also present opportunities for those employing tactical investment strategies.

Against this backdrop, investors can consider two distinct approaches to navigating market turbulence. The first involves maintaining a longer-term investment horizon and increasing allocations to relatively defensive funds to help manage downside risks. The second focuses on taking tactical positions in ETFs to potentially capitalize on short-term spikes in market uncertainty. Here, we highlight ETFs that cater to both investment strategies.

Rather than relying exclusively on a defensive investment approach, investors can consider combining relatively stable equity exposure with tactical investments to navigate changing market conditions.

However, tactical strategies involve substantial risks and are generally better suited to investors with higher risk tolerance, shorter investment horizons and the ability to actively monitor and adjust their positions as market conditions evolve.

Protecting Capital With Low-Volatility ETFs

As market volatility increases and concerns about a potential correction intensify, protecting capital becomes increasingly important. While equities remain an important component of long-term wealth creation, sharp market declines can significantly erode portfolio values, making downside risk management an important part of investment strategies.

Low-volatility ETFs seek to provide a smoother investment experience by focusing on stocks that historically exhibit lower levels of market volatility. Against the backdrop of heightened market uncertainty, investors may consider shifting a portion of their equity allocations toward these ETFs as a relatively defensive way to maintain stock market exposure while managing downside risks.

Low-volatility strategies often provide exposure to defensive sectors, including healthcare, utilities and consumer staples, where earnings and demand tend to remain more stable during uncertain periods. Such characteristics may help these sectors navigate periods of economic uncertainty and market turbulence, making low-volatility ETFs an attractive option for investors seeking to balance equity market participation with downside risk management.

Investors can consider Invesco S&P 500 Low Volatility ETF (SPLV Quick QuoteSPLV - Free Report) , Invesco S&P 500 High Dividend Low Volatility ETF (SPHD Quick QuoteSPHD - Free Report) and State Street SPDR US Large Cap Low Volatility Index ETF (LGLV Quick QuoteLGLV - Free Report) .

Regarding annual fees, LGLV is the cheapest option, charging 0.12%. SPLV has its top three allocations to utilities (27.40%), financials (23.55%) and real estate (16.18%).

SPHD has its top three allocations to real estate (19.84%), consumer staples (18.78%) and utilities (14.26%), while LGLV’s top three allocations are industrials (21.36%), real estate (16.43%) and financials (11.74%).

SPHD has the highest dividend yield among the three funds mentioned, with 4.71%. However, with a one-month average trading volume of 2.32 million shares and an asset base of $7.62 billion, SPLV is both the most liquid and the largest fund mentioned.

Play Volatility With Volatility ETFs

While low-volatility ETFs may help investors manage downside risks, volatility ETFs provide tactical exposure to fluctuations in expected market volatility and could potentially benefit from sharp increases in investor uncertainty. A further deterioration in market sentiment and rising volatility expectations may create additional near-term opportunities for these funds.

Given the current macroeconomic backdrop and persistent market volatility, adopting a more tactical investment approach and adjusting portfolio exposure in response to changing market conditions could prove beneficial. Against this backdrop, volatility ETFs may offer an avenue for investors seeking to capitalize on near-term market turbulence.

However, volatility-linked funds carry substantial risks and are generally designed for short-term tactical bets rather than long-term investing. Consequently, these products are best suited for experienced investors who can actively monitor and manage their positions. Investors should carefully assess their risk tolerance and investment horizon before considering these funds.

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

With a one-month average trading volume of 14.27 million shares, VXX is the most liquid option, offering investors easier entry and exit, making it well-suited for tactical positioning and short-term hedging strategies in the current volatile economic backdrop.

VXX has gathered an asset base of $556.1 million, the largest asset base among the abovementioned funds. Regarding annual fees, VIXY and VIXM are the cheapest options, charging 0.85%.