Top 3 ETFs to Hedge Against Inflation in 2025

Key Points

• Inflation remains a critical risk for investors heading into 2025, although there is a large degree of uncertainty.
• ETFs focused on Treasury inflation-protected securities, commodities, and collateralized loan obligations may help to hedge against inflation.
• Three ETFs in particular—TIP, USO, and BKLN—stand out, although each carries risks investors should be aware of.

The Federal Open Market Committee closed 2024 with its third consecutive reduction to the overnight borrowing rate, while Chair Jerome Powell suggested the pace of rate cuts is likely to slow in the coming year or more. Though the Fed lowered rates multiple times in recent months amid strong economic growth and easing inflation, there is broad uncertainty about how these two metrics will shift into the new year.

Inflation has turned out to be especially stubborn, lingering above the Fed's 2% goal—the body recently increased its 2024 core inflation expectation to 2.8%. Complicating matters, the incoming Trump administration advocated for a number of policies that may be inflationary, including wide-ranging tariffs and mass deportations.

For investors looking to set up their portfolios for the new year, this environment becomes a tricky one to navigate. Investors taking a more cautious approach might want to position their investments to hedge against inflation. Fortunately, there are a number of exchange-traded funds (ETFs) that can serve as good bets in the face of an inflationary environment. These funds are easy to access, require little oversight on the part of the investor, and explore a variety of different asset classes and sources.

Broad TIPS Exposure to Combat Inflation

Treasury inflation-protected securities, or TIPS, are Treasury bonds indexed to inflation such that their par value will increase during inflationary periods. This makes TIPS one of the most popular government-issued securities among investors concerned about inflation.

While it is certainly possible to hedge against inflation by purchasing TIPS directly, the iShares TIPS Bond ETF NYSEARCA: TIP goes a step further to make accessing these bonds even easier. The fund provides investors with exposure to a broad array of TIPS with many different terms for a modest fee of just 0.19%.

TIP is a low-risk fund, given that all of its holdings are Treasury bonds backed by the U.S. government, and as such also tends to have a modest return. While there are several other TIPS-focused ETFs available, investors often favor TIP because it has the largest asset base and the highest and most consistent liquidity of any of these funds. Still, it's worth keeping in mind that TIP is not a guaranteed protection against inflation—investors should keep an eye on interest rates while investing in this fund as well.

Oil as a Protective Measure

Commodities have historically been a strong hedge against inflation. According to Goldman Sachs, a 1% surprise increase in inflation in the United States has led to a boost of 7% to real returns for commodities as a broad category.

Among commodities, oil can be a particularly advantageous way of protecting against the risk of inflation because energy products typically respond to both supply and demand shocks, while some other commodities tend to do better in one or the other of these cases.

The United States Oil Fund NYSEARCA: USO is a good balance of value and liquidity among oil ETFs. This fund has an expense ratio of 0.60% and assets under management of $1.1 billion as of December 26, 2024. While it's not the largest nor the most liquid energy commodity fund, it is topped on both fronts by the United States Natural Gas Fund NYSEARCA: UNG, and it is more affordable than some of its rivals (UNG included).

Investors in USO should be aware that volatility in oil prices often exposes holders of this fund to contango, which can be an issue for long-term fund investors.

Take a Chance on the CLO Space

Collateralized loan obligations (CLOs) are securities comprising tranches of high-risk debt, such as leveraged loans issued to companies seen as a default risk for one reason or another. These securities are attractive to investors who are cautious about inflation because they are often based on a floating rate yield. However, the level of risk to the investor is considerably higher than many are willing to take on.

The Invesco Senior Loan ETF NYSEARCA: BKLN is one of the most popular ways to access the CLO space via ETF. By providing a broad portfolio of loans within a single ETF, BKLN may help to mitigate the risk associated with default. Still, BKLN is not advisable for investors unfamiliar with this high-risk space.