What Does Q4 Hold for the U.S. Economy? ETFs to Consider

The S&P 500 Index has gained roughly 3.7% so far in September, bringing year-to-date gains to 13%. With the Fed delivering its first rate cut of 2025 in September and markets pricing in two more cuts this year, some market upside appears likely in the near term.According to the CME FedWatch tool, markets are anticipating a 94.1% likelihood of an interest rate cut in October and a 99% likelihood of an interest rate cut in December. However, weak consumer confidence, fears of rising inflation levels and persistent economic tensions raise the odds of a downside, making a conservative strategy more appealing.A cautious tone from Fed Chair Jerome Powell, along with geopolitical tensions in the Middle East and the Ukraine-Russia conflict, further supports the case for increasing exposure to defensive funds. Powell also commented that equity prices may be overvalued, as quoted on Reuters.What to Expect From the Market in Q4Per S&P Global forecasts, the U.S. economy is forecast to expand 1.9% this year and 1.8% in 2026, slightly higher than the previous estimates but still below the recent trend.The projection highlights stronger-than-expected economic activity so far in the third quarter, with tech investment providing a tailwind for the U.S. economy. Private sector activity and defense spending are anticipated to be a bit stronger than previous forecasts.However, consumers remain cautious amid concerns over job security and inflation, while corporates face uncertainty due to shifting trade policies. Additional pressure on consumers, fueled by rising debt burdens and stringent immigration policies, also weighs on sentiment.According to S&P Global, tariffs remain a key driver of inflation pressures, while stringent immigration policies are likely to constrain U.S. labor supply and weigh on economic activity.Why Staying Conservative Makes Sense NowInvestors are advised to maintain a cautious stance and follow a conservative investment theme in the coming quarter. With heightened nervousness and close attention on economic data and official commentary, market sentiment remains fragile. Even minor negative developments could unsettle markets, prompting overselling or panic-driven moves.Preserving capital and cushioning volatility is key for investors looking to navigate a volatile period. Investors should adopt a defensive approach as it's better to be cautious than unprepared.With ETFs offering the additional benefit of instant diversification and tax efficiency, investors can use them to increase exposure to defensive funds. Investing in these sectors provides dual benefits, protecting portfolios during market downturns and offering gains when the market trends upward.ETFs to ConsiderBelow, we have highlighted a few areas in which investors can increase their exposure.Consumer Staple ETFsIncreasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can allocate more funds to consumer staples funds to protect themselves from potential market downturns.Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.Dividend ETFsDividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantages of safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.Investors can consider Vanguard Dividend Appreciation ETF VIG, Schwab US Dividend Equity ETF SCHD and Vanguard High Dividend Yield Index ETF VYM, which have dividend yields of 1.63%, 3.74% and 2.50%, respectively.More Defensive OptionsInvestors can consider quality and value funds if they want to increase their exposure to more defensive funds. Funds like Vanguard Value ETF (VTV) and iShares MSCI USA Quality Factor ETF QUAL are good options.Investors can also increase exposure to volatility ETFs like iPath Series B S&P 500 VIX Short-Term Futures ETN VXX. These funds have delivered short-term gains during periods of market turmoil and could continue to rise if volatility persists.Boost Your Portfolio with Our Top ETF InsightsZacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.Don’t miss out on this valuable resource. It’s free!Get it now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports Vanguard Consumer Staples ETF (VDC): ETF Research Reports iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports Vanguard High Dividend Yield ETF (VYM): ETF Research Reports Schwab U.S. Dividend Equity ETF (SCHD): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks