From Volatility to Opportunity: Active ETFs as a Safe Haven During Political Shifts

For investors using index or passive investments, the presidential administration transition could prove to be a real headache — full of lower returns, underperformance and even losses.

This is a prime example of how active management could prove to be a portfolio’s savior. The nimbleness of active ETFs is a great way to fight uncertainty and hedge some of the risks.

The U.S. presidential election cycle is often a mixture of uncertainty and rising volatility for the stocks and bonds markets. This is because market participants often react and overreact to new policies, leadership changes, and shifts in geopolitical dynamics. The uncertainty of future policy points and direction gives investors an abysmal night’s sleep.

This chart from asset manager Calamos highlights the increased volatility during election cycles. Looking at data from FRED and J.P. Morgan, you can see the spikes of volatility during election years.

The interesting thing about the chart is that the uncertainty normally drifts lower as the markets and investors adapt and work within the new political framework. However, it’s important to note that from 2016 to 2020, volatility remained high and was subjected to several big spikes.

Politics aside, the reelection of Donald Trump could lead to a repeat of the volatility during his first term. Again, uncertainty is to blame. Trump has historically been a “shoot from the hip” president, often creating policy points during the heat of the moment or changing his mind at the last minute. The debate isn’t about whether or not those are good or bad traits, but how much uncertainty they can create from a business or market point of view. Trump’s policies have the potential to create an uneven atmosphere among various sectors while adding plenty of change to long-held government agencies and organizations.

For example, Trump has long proposed increasing tariffs on Chinese goods to as much as 60%. Some policy pundits have suggested that these seem unlikely, however, the uncertainty around what simply is a “threat” vs. actual implementation is growing. Recently, Walmart reported that it would most likely need to raise prices to cover any tariffs that may be implemented. Lowe’s echoes similar statements.

The same could be said for immigration reform and defense. During Trump’s first term, defense stocks surged. However, policy points reducing America’s role in NATO and the interruption in the support of Ukraine could derail aerospace & defense stocks in a big way. Agricultural firms have expressed concern over the potential loss of workers during key harvest seasons.

Uncertainty remains around many of the recent appointees to cabinet positions from industry outsiders. Again, uncertainty and volatility over changes or the unevenness of the changes have grown.

Previous so-called ‘Trump Trade’ ideas may not work this time around, and in fact, several sectors that won big during his first time have failed to create strong gains in the wake of the election results.

So, what can or should an investor do? Rising volatility and uncertainty of action create a tough environment to navigate. How can investors get good returns and reduce their risks?

They could go active with their portfolios.

As we’ve said before, index ETFs and passive products are great as they allow investors to own the whole market and provide plenty of diversification benefits. But for all the winners, there are still plenty of losers. Active ETFs don’t have to look like the broader indexes. Managers can be overweight, underweight, or avoid sectors altogether if the narrative doesn’t support those industries. Why bet big on firms that will suffer under the weight of tariffs, when you can own those benefiting from domestic protection?

Secondly, active managers don’t have to keep that underweight/overweight static. They can change as needed. “Shoot from the hip,” just as Trump has the propensity to do.

Active ETFs can benefit from that change on the tax front as well. The ETF structure and the creation/redemption mechanism allow managers to pass capital gains taxes onto authorized participants (APs) through in-kind redemptions. This improves their tax efficiency, which is key given the highly volatile environment.

Finally, active ETFs can help limit losses and reduce volatility as they have the ability to flee to cash if necessary. Passive index ETFs are required to stay fully invested during all market periods. However, active managers can go to cash and wait out periods of high volatility to deploy capital at opportune times. This could help reduce drawdowns in their funds.

These ETFs were based on their size. They are sorted by their YTD total return, which ranges from -2.7% to 7.8%. They have expense ratios between 0.17% and 0.36% and have assets under management between $5B and $30B. They are currently yielding between 0.8% and 9.7%.

In the end, election cycles tend to be very volatile for investors, and based on historical data, Trump’s reelection has the potential to keep that volatility high throughout his term. The uncertainty surrounding policies, their implementation, and their changes prevent investors from successfully allocating their resources. Passive funds fall flat during this time.

The secret to success here is to go active. Active ETFs allow investors to not look like the major indices, to find winners, to pass off taxes, and, ultimately, to reduce risk and volatility in the current environment.

Election cycles have often brought about high volatility and uncertainty. This cycle is no different. However, with Trump’s reelection, that uncertainty may continue. Confusion about policy implementation and changes to those policies could create a highly volatile environment, just like last time. Active ETFs could be the life jacket that investors need to get through all the ambiguity.