We try and stress this with clients all the time, but with everything going on in the US and in the world right now, it feels even more important to reiterate: markets HATE uncertainty. Right now, economists and market analysts across the world are trying to understand the immediate and long-term impacts that changes to tariffs will have on markets. This speculation is exactly the point; nobody can say for sure what the results will be (i.e. uncertainty), and that’s leading to high levels of market volatility.
You can’t turn on a television or open a web browser without being faced with information about tariffs. The White House has been open about their goal of levying tariffs with some form of reciprocity for months. Whether you agree or disagree with their reasoning and justifications, it remains important to understand what tariffs are, how they’re paid for, their potential impact on investment portfolios, and the importance of diversification. Let’s take a look.
What is a Tariff?
Tariffs are taxes (or duties) that a government places on goods imported into their country. They’re intended to protect domestic industries from foreign competition, generate revenues for governments, and balance trade deficits and/or surpluses. Generally, the cost of imported goods rise when tariffs are applied or increased, which makes these goods less competitive when compared to the same goods produced by domestic manufacturers. This can help the local companies compete in their industry, but it can also potentially lead to higher prices (inflation), slower economic growth, reductions in productivity, and may result in damaged relationships globally.
Who pays the Tariff?
It’s possible you’ve heard that foreign companies who produce and export goods pay these tariffs. More often, the cost of the tariff is paid by the importer in the form of higher prices. Foreign companies or countries don’t actually pay the tax; the companies importing these tariffed goods pay the tariffs to their own government. This, understandably, makes it more expensive to bring in foreign goods, and the increased expense is often passed along the supply chain, leading to higher prices for wholesalers, retailers, and eventually, consumers of the products. Knowing this, domestic importers have a choice. They may pass these costs on down the line, they may absorb the cost and reduce their own margins, or they may decide to source goods from suppliers locally, or outside of the tariffed area. This last option has its own challenges as it takes time to change out links in the supply chain, and it often comes at a higher price (because if it was already cheaper or the same price to source the same goods locally, they wouldn’t be bringing in foreign goods).
How might Tariffs affect my portfolio?
To answer this question, we need answers to many other questions that we just don’t currently have. Questions like, how long will these tariffs be in place? Will these tariffs cause importers to source goods locally? If so, at what extra cost? Will the tariff be consistently applied, or are there specific sectors being targeted? Without these answers, we can’t confidently speculate the impact they’ll have on markets globally. We can, however, drill down into different asset classes to understand the impact tariffs may have on their underlying companies. Let’s look at two examples:
US Large-Cap Stocks
Large-cap companies tend to be more global and derive larger portions of their revenues from outside the US. While they may have more tariff exposure, they also tend to have more diversified supply chains and can adjust more quickly to changes in policy.
US Small-Cap Stocks
Small-cap companies, on the other hand, tend to have more of a domestic focus, often generating a larger proportion of their revenues from within the US. Because they are often less reliant on trade, they may be less sensitive to tariffs.
With both asset classes, however, there are many factors that impact their business, including interest rates, economic backdrops, investor sentiment, and many more. While it’s impossible to say exactly how the new policies will impact the wide world of investing, it remains important to understand the fundamentals of each underlying investment product and make educated, unemotional decisions.
How can diversification help?
We believe in the principles of diversification, and within the funds that we manage, this is a key component to weathering the storms brought on by the unknown. While tariffs imposed by the US can have an impact globally, including the potential retaliatory responses from foreign countries, diversifying across asset classes, both foreign and domestic, can help smooth the waters.
While US stocks have been getting most of the headlines when it comes to the impact that new tariff policies are having and may continue to have on valuation, international stocks are performing relatively well so far in 2025. This exemplifies the importance of diversifying investments.
| Index ETF | 2025 YTD Returns (as of 04/03/2025) |
| iShares Core S&P 500 ETF (IVV) | -7.91% |
| iShares Core MSCI EAFE ETF (IEFA) | +6.27% |
Source: Yahoo! Finance, YTD Returns for IVV and IEFA
As we look towards the future and times of certainty (or at least, less uncertainty), we’re confident in the levels of exposure we have to varying asset classes across the strategies used in the funds we manage. Times like these are why we diversify. We know that large US companies have become historically expensive to own, but whether the impact tariffs are having on their stock prices will have a lasting, correction-style impact is yet to be seen. Either way, we trust in fundamental analysis and taking a diversified, forward-looking approach to how we manage investments. Please reach out with any questions or to discuss further.
Information provided herein reflects Frontier’s views as of the date of this presentation and can change at any time without notice.
This information has been prepared by Frontier based on data and information provided by internal and external sources. While we believe the information provided by external sources to be reliable, we do not warrant its accuracy or completeness. Nor should their use be construed as an endorsement.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
Elevate Wealth Management is the financial planning division of Frontier Asset Management. Frontier Asset Management is a Registered Investment Adviser with the Securities and Exchange Commission. The firm’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www.frontierasset.com. They include important disclosures and should be read carefully.
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