Best ETFs for Trade War Fallout and Stagflation in 2025

The best exchange-traded funds for the second half of 2025 may end up being the same funds built for stagflation that outperformed in the first-quarter runup to President Donald Trump’s April 2 “Liberation Day” announcement of sweeping reciprocal tariffs.

As the U.S. stock market, as measured by the S&P 500, neared the 20% correction (bear market) mark, Trump reversed course and placed a 90-day pause on those tariffs, spurring a massive shift in market sentiment that led to the best May performance for stocks in 35 years. The giant buy-the-dip play on the president's on-off tariff policy became known as the "Trump Always Chickens Out," or TACO, trade.

As the 90-day suspension on the broadest U.S. tariffs in a century nears its expiration in July, markets are bracing for a re-escalation of trade tensions.

Meanwhile, soft economic data, such as declining consumer sentiment and a softening job market, continue to point to a slowdown. This creates a volatile and challenging fixed-income environment, much like we saw in the first three months of the year.

Add in the persistent threat of inflation and investors may once again turn to the ETF strategies that outperformed in the first quarter: those built to weather stagflation and provide equity exposure outside the U.S.

Best ETFs in Q1: Stagflation ETFs and European Equities

During the first quarter of 2025, several categories of ETFs outpaced the S&P 500 by offering defensive positioning, income stability or inflation protection. These funds, which may be headed for a repeat performance, include the following ETF segments.

Defensive Sector ETFs

Sector ETFs focused on consumer staples, utilities and healthcare held up well as economic growth slowed and volatility spiked.

Ultra-Short-Term Bond ETFs

With yields on cash-like instruments remaining elevated, funds that track an index of Treasurys with (ultra-short) maturities between 0-3 months became popular sources of income with minimal price risk.

Precious Metals ETFs

Gold and silver rebounded strongly as investors sought safe-haven assets during market volatility and geopolitical risk.

Inflation-Protected Bond ETFs

Treasury Inflation-Protected Securities (TIPS) ETFs offered a buffer against inflationary pressures, while hedge-style funds like the Simplify Interest Rate Hedge ETF (PFIX) gained attention as insurance against rising long-term interest rates.

Europe ETFs: Broad Market and Defense

European equity funds, both broad-market and defense sector-concentrated, have outperformed U.S. stocks in 2025 as investors seek relative stability amid escalating U.S. trade tensions, a weaker U.S. economic outlook and rising geopolitical tensions.

Best ETFs for Trade War Fallout, Stagflation 2025

Let’s take a closer look at how these ETF types are structured and what they offer in the way of protection against the potential for trade war economic fallout and stagflation in the second half of 2025.

Defensive Sector ETFs

• Consumer Staples Select Sector SPDR Fund (XLP): Invests in household name brands that consumers continue to spend on during economic downturns, such as food, beverages and cleaning products
• Utilities Select Sector SPDR Fund (XLU): Offers exposure to electric, gas and water utility stocks that tend to provide consistent dividends and stable earnings
• Health Care Select Sector SPDR Fund (XLV): Focuses on companies in pharmaceuticals, biotechnology and healthcare services—sectors that typically see steady demand even in a weak economy

Ultra-Short-Term Bond ETFs

• iShares 0-3 Month Treasury Bond ETF (SGOV): Tracks ultra-short-term U.S. Treasurys, offering high yield with low duration risk
• SPDR Bloomberg 1-3 Month T-Bill ETF (BIL): Similar to SGOV, provides exposure to short-term government bills, making it a haven for conservative investors seeking income

Precious Metals ETFs

• SPDR Gold MiniShares Trust (GLDM): A cost-efficient way to gain exposure to gold, a traditional inflation and volatility hedge
• iShares Silver Trust (SLV): Offers direct exposure to silver prices, which can benefit from both industrial demand and safe haven interest

Inflation Protection and Hedge ETFs

• Vanguard Short-Term Inflation-Protected Securities ETF (VTIP): Targets short-term TIPS, protecting purchasing power while limiting interest rate risk
• iShares TIPS Bond ETF (TIP): Provides broad exposure to U.S. Treasury inflation-protected securities across maturities
• Simplify Interest Rate Hedge ETF (PFIX): Designed to benefit from sharp rises in long-term interest rates, using derivative exposure to hedge portfolios

Europe ETFs: Broad Market and Defense-Focused

• iShares MSCI EAFE ETF (EFA): This ETF provides broad exposure to large- and mid-cap stocks in developed international markets outside the U.S. and Canada, with heavy weightings in European countries like the U.K., France and Germany. EFA has gained momentum as investors seek diversification away from U.S. macro risks.
• Select STOXX Europe Aerospace & Defense ETF (EUAD): Issued by Tuttle ETFs, EAUD is riding a wave of increased military spending in the EU amid global geopolitical tensions, EUAD focuses on European defense contractors and related industries. With defense budgets surging, the fund has posted strong performance year to date.

Best ETFs to Manage Risk in 2025

With trade tensions poised to re-ignite and economic signals remaining mixed, 2025 could bring heightened volatility, higher inflation and more complex policy decisions. Investors may want to revisit the ETF strategies that outperformed in the first quarter—those offering stability, income, protection from inflation and now, exposure to stronger-performing international markets.

Whether it’s defensive sector funds, ultra-short Treasury ETFs, gold and silver exposure, targeted inflation hedges or broad and thematic Europe ETFs like EFA and EUAD, today’s environment underscores the value of diversification. As global dynamics shift, a well-balanced ETF portfolio may be the best approach to staying resilient through the uncertainty ahead.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune held a position in SGOV.