With tariffs remaining a central theme in the Trump administration’s trade policy, tariff turbulence may soon give way to tariff fatigue. For now, we can assume a strong reaction from investors with each new trade policy announcement, and short-term volatility is a likely companion to trade war news. However, history has shown that these impositions are not a reason to make sweeping changes to long-term portfolios.

While these types of taxes can create sector-specific disruptions, markets have consistently adapted over time to shifts in trade policy. The new administration will leave its impact on the global economic landscape, and there are ways that individuals can prepare their portfolios accordingly. Investors, though, should resist knee-jerk reactions and focus on tactical adjustments.

Tariffs in the Short and Long Run

In the short run, tariffs can lead to higher costs for companies that rely on imported parts and materials, such as automakers, tech firms, and big-box retailers. These companies often pass the increased costs on to consumers, creating temporary inflationary pressures. Over the long run; however, supply chains shift, and companies eventually find alternative suppliers or domestic substitutes. The market rebalances, and the initial pain subsides.

Additionally, tariffs aren’t always permanent. President Trump has a track record of using tariffs as a negotiation tool versus as a long-term economic policy. Investors should recognize that some of the market’s reactions may be overblown, especially if the impositions are designed to influence trade deals rather than remain long-term fixtures. While tariffs may increase costs for some sectors, deregulatory measures can provide relief by reducing business expenses elsewhere. Certain industries, particularly regional banks, energy, and industrials, could benefit from lower regulatory burdens, ultimately mitigating the impact of higher import costs.

Tactical Portfolio Adjustments to Consider

Although long-term strategies should remain intact, investors can make calculated short-term adjustments for opportunistic or defensive purposes. Utilities remain an attractive sector during tariff volatility, as this space continues to offer stability and strong dividend yields. With their crucial role in supporting AI and crypto mining infrastructure, they present a potentially attractive investment option. Regional banks also stand to benefit, as they have less exposure to global trade disruptions and may gain from deregulation efforts.

Industrials and defense stocks are another area to consider overweighting, with increased domestic spending on infrastructure and national security contracts providing stability.

These themes also tend to have another attractive element in common, and that is dividend yield. Dividend-paying stocks, in general, help smooth returns during volatile periods by providing a steady income stream even when stock prices fluctuate. Shifting trade policies can create uncertainty, and strong dividend payout ratios are generally a reliable way to hedge against unpredictable economic environments. Historically, utilities, financials, and industrials have maintained strong dividend payouts.

On the other hand, multinational tech companies may struggle due to their reliance on foreign semiconductors and vulnerability to supply chain bottlenecks. Similarly, big-box retailers that depend on low-cost imports could see their margins squeezed. Automakers with foreign supply chains could also face headwinds, as higher tariffs on parts could disrupt manufacturing and lead to lower profitability.

The Role of ETFs in a Tariff-Driven Market

Trade wars create winners and losers and identifying them in advance is notoriously difficult. Tariff policies shift, supply chains adjust, and unexpected sectors can quickly feel the effects. Rather than trying to time these moves or bet on specific companies, exchange-traded funds (ETFs) provide can provide broader exposure, allowing investors more diversification against tariff-related volatility without making drastic portfolio shifts.

By investing in ETFs that focus on domestic sectors such as utilities, financials, and industrials, investors could reduce exposure to import-heavy industries. These sector-focused ETFs allow for targeted tactical adjustments while still maintaining broad market exposure, avoiding the risks of placing concentrated bets on individual stocks.

Additionally, dividend-focused ETFs may help smooth returns during uncertain periods. Given that tariff-related volatility can impact earnings, stable dividend payers across defensive sectors such as utilities and financials can offer a cushion against market fluctuations.

For investors seeking long-term stability, broad-based index ETFs remain a solid option. While tariffs may create near-term disruptions, history has shown that equity markets adapt over time. By spreading risk across multiple industries, diversified ETFs help diversify a portfolio so it is not overly dependent on any one industry’s trade policy risk.

Maintaining Geographic Diversification in a Tariff-Heavy Environment

Investors may be concerned about the impact of their international exposure in a higher tariff environment and look to double down on US markets. While it’s possible that many industries increase their footprint in the US due to tariffs and other trade policies under the new administration, too much focus on US equities may increase portfolio risk.

Instead of retreating from international exposure, investors should consider taking a broad approach with their holdings across multiple regions to counteract the impact of tariffs. While tariffs can disrupt trade flows between specific countries, global supply chains continue to evolve, making geographic diversification a key risk management tool.

One way to hedge tariff uncertainty is by allocating to markets with less direct exposure—particularly emerging markets in Southeast Asia, India, and Latin America, which are becoming alternative manufacturing hubs.

Additionally, global infrastructure and renewable energy investments are another way to achieve international diversification while reducing exposure to tariff-sensitive industries like tech and retail. Many of these sectors operate outside direct tariff exposure, offering resilience amid trade disruptions.

For fixed-income investors, international bonds and currency-hedged ETFs could provide another layer of protection, allowing portfolios to potentially benefit from different interest rate environments while mitigating direct tariff exposure.

The Takeaways on Tariffs

Investors may want to avoid making dramatic portfolio shifts based on tariff headlines alone. Sticking to core allocations while making tactical adjustments could provide investors to hedge against short-term risks without compromising long-term growth. By diversifying away from import-heavy industries and focusing on dividend stability, investors can take advantage of some cash returns while further diversifying risk during tariff-driven volatility.

Disclosure: Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Carson Partners, a division of CWM, LLC, is a nationwide partnership of advisors. This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. CWM, LLC, any other named entity or any of their representatives may not give legal or tax advice.

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Faron Daugs is a Certified Financial Planner™ and wealth advisor with more than 30 years of experience. As the founder and CEO of Harrison Wallace Financial Group, he serves as a go-to source and trusted advisor for his clients across the country. With offices in Libertyville, Illinois and Nashville, Tennessee, Harrison Wallace Financial Group provides comprehensive wealth management services and a consultative approach to help entrepreneurs, executives, self-made millionaires, and generations of families meet their financial goals. Faron has been awarded Chicago Magazine’s Five Star Wealth Manager Award several years in a row and regularly shares his financial advice with such publications as Newsmax Finance, CNBC, Investor’s Business Daily, MarketWatch, The Wall Street Journal, TheStreet, U.S. News & World Report, WGN-AM’s Wintrust Business Lunch, to name a few.