Pressure Mounts on U.S. Consumers Amid Middle East Conflict: ETFs to Watch

The prolonged Middle East conflict is putting increasing pressure on consumer sentiment, leading to a decline in confidence. According to preliminary results from the University of Michigan's Surveys of Consumers, U.S. consumer sentiment weakened in early March. The Index of Consumer Sentiment fell 1.9% from February and was down 2.6% from a year ago.

So far, 2026 has offered little reassurance to consumers and investors, with volatility remaining elevated. The CBOE Volatility Index has risen 8.15% since the start of this month and has added 56.43% this year so far, a clear sign that volatility and consumer nervousness are intensifying.

Escalating market volatility and mounting economic headwinds are putting increasing strain on consumer finances. As confidence weakens, consumers are becoming more cautious and reassessing discretionary spending.

Per Surveys of Consumers Director Joanne Hsu, although pre-conflict interviews pointed to improving sentiment, the deterioration in the nine days that followed fully reversed those gains. Per Hsu, gasoline prices emerged as the most immediate pressure point for consumers.

Oil-Driven Inflation to Squeeze Consumers

Oil prices have surged since the onset of the Middle East conflict. With the war expected to persist longer than anticipated, ongoing supply disruptions, including the closure of the Strait of Hormuz and continued threats to oil infrastructure in the region, are likely to keep prices elevated.

The surge in oil prices has revived inflation concerns, as elevated energy costs risk fueling broader price pressures and complicating central bank policy, adding to investor unease.

With consumer confidence already down from the year-ago levels, as highlighted by Surveys of Consumers from the University of Michigan, rising inflationary pressure ahead could complicate the outlook for consumers.

Debt Pressures Intensify Consumer Woes

Concerns over U.S. debt levels can add pressure to investor and consumer confidence, making investors risk-averse, along with curtailing discretionary spending and creating an income problem for investors. Already at elevated levels, the national debt could climb further, given the current economic backdrop.

The ongoing conflict in the Middle East could place a strain on government finances through higher war-related costs and expectations of increased military spending, deepening income concerns for investors.

Rising national debt levels can create further economic headwinds, including the risks of elevated inflation, exacerbating inflationary pressures. If the government decides to repay its debt by increasing the money supply, it risks devaluing the currency, pushing up the inflation level.

ETFs to Consider

Below, we highlight a few funds that investors may consider increasing exposure to as consumer confidence declines, according to the preliminary survey. With the Middle East conflict set to drag on, relief for consumers may remain elusive.

Consumer Staples ETFs

The fall in consumer confidence could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. The S&P 500 Consumer Staples Index has gained 9.92% over the past year and 10.11% this year so far.

Investors can consider Consumer Staples Select Sector SPDR Fund XLP and iShares U.S. Consumer Staples ETF IYK.

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. The S&P 500 Utilities Index has gained 19.79% over the past year and 9.98% this year so far.

Investors should gain from funds like Utilities Select Sector SPDR Fund XLU and iShares U.S. Utilities ETF IDU.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage 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 1.62%, 3.39% and 2.34%, respectively.

More Defensive Bets

Investors may consider boosting exposure to healthcare and quality ETFs as confidence weakens. Amid market uncertainty, quality investing emerges as a strategic response as a potential buffer against the potential headwinds. Investors can look at funds like iShares MSCI USA Quality Factor ETF QUAL.

The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. The long-term fundamentals remain strong, given encouraging industry trends. Investors can look at funds like Health Care Select Sector SPDR Fund XLV.

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State Street Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

State Street Health Care Select Sector SPDR ETF ETF (XLV): ETF Research Reports

State Street Utilities Select Sector SPDR ETF (XLU): ETF Research Reports

Vanguard Dividend Appreciation Index Fund ETF Shares (VIG): ETF Research Reports

iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports

iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports

iShares U.S. Utilities ETF (IDU): ETF Research Reports

Vanguard High Dividend Yield Index Fund ETF Shares (VYM): ETF Research Reports

Schwab U.S. Dividend Equity ETF (SCHD): ETF Research Reports

This article originally published on Zacks Investment Research (zacks.com).

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