Top Alternative ETFs Balance Risk and Return in 2025

As investor anxiety has risen in 2025 over the dual threat of an escalating trade war and stagflation—a troubling mix of rising inflation and a slowing economy—alternative ETFs have emerged as surprising standouts, outperforming the S&P 500 year to date.

While traditional stock and bond portfolios have struggled to find footing in this uncertain environment, many investors have turned to alternative investment strategies for diversification, downside protection and inflation hedging.  

Collectively categorized as "alternatives," these ETFs span a variety of unique approaches, including funds that hedge against rising interest rates, target real returns through a blend of assets and seek stable performance through merger arbitrage.

In this data dive, we shine a light on lesser-known alternative investment strategies that have not only outperformed the broader stock market in 2025 but have offered the kind of diversification that portfolios need for navigating today’s challenging economic environment.

Top-Performing ETFs 2025: Alternative Investment Strategies

Year-to-date performance data for Alternatives from etf.com Pulse Tool as of May 28, 2025—Source: FactSet. For reference, S&P 500 total gain was 0.6% for the same period.

PFIX: Simplify Interest Rate Hedge ETF

The Simplify Interest Rate Hedge ETF (PFIX) is designed to hedge against sharp increases in long-term interest rates by using options on Treasury futures. It typically gains value when Treasury yields rise, making it a potential portfolio tool for managing interest rate risk.

RLY: iShares Multi-Asset Inflation Hedged ETF

The iShares Multi-Asset Inflation Hedged (RLY) invests in a diversified mix of asset classes, including commodities, TIPS and real estate, that historically perform well during inflationary periods. The fund aims to provide a real return that keeps pace with or exceeds inflation.

MNA: IQ Merger Arbitrage ETF

The IQ Merger Arbitrage ETF (MNA) seeks to capture returns from announced merger and acquisition deals by investing in takeover target companies while shorting broad market ETFs to hedge risk. This strategy aims to generate steady, low-volatility returns largely uncorrelated with broader market movements.

TYA: Simplify Risk Parity Treasury ETF

The Simplify Risk Parity Treasury ETF (TYA) offers leveraged exposure to long-duration U.S. Treasurys and is designed to outperform a U.S. Treasury 20+ year index for a calendar quarter. To seek its objective, the portfolio uses futures, call and put options on U.S. Treasury futures, ETFs and government securities.

UPAR: Simplify Tail Risk Strategy ETF

The Simplify Tail Risk Strategy ETF (UPAR) provides leveraged exposure to an index that allocates to four major asset classes: global equities, U.S. Treasurys, commodities and TIPS based on risk parity. The fund dynamically adjusts its exposure to reduce drawdowns during major equity selloffs.

What are Alternative ETFs?

Alternative ETFs are exchange-traded funds that invest in non-traditional asset classes or use alternative investment strategies. Often collectively referred to as "alternatives," these assets and strategies are those that differ from conventional stock and bond investments and management approaches.  

These ETFs generally attempt to provide diversification, reduce risk, enhance returns or hedge against market downturns by using various approaches.

Types of Alternative Investment ETFs

• Commodity ETFs: Invest in physical assets like gold (GLD), oil (USO) or broad commodities (DBC); often used as inflation hedges or safe havens
• Real asset ETFs: Include real estate ETFs (like VNQ) and infrastructure ETFs, which offer exposure to physical assets and income streams
• Hedged or market neutral ETFs: Try to reduce market risk by holding both long and short positions (e.g., QAI); seek stable returns regardless of market direction
• Managed futures and trend-following ETFs: Use quantitative models to go long or short futures contracts on commodities, currencies and more (e.g., DBMF)
• Volatility ETFs: Track volatility indices like the VIX; often used to hedge market downturns (e.g., VXX, UVXY); can be highly volatile and are often used for short-term trading
• Private credit or alternative lending ETFs: Newer products that blend public bonds and private credit (e.g., PRIV); seek to provide higher yields with less correlation to traditional bond markets
• Leveraged and inverse ETFs: Offer 2x or 3x exposure to an index or sector, or the inverse of its performance (e.g., SOXL, SQQQ); meant for short-term trading, not long-term investing, due to daily compounding

Investors considering alternative ETFs are encouraged to understand how they work, what they hold and whether they align with their risk tolerance and investment goals.

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 did not hold a position in any of the aforementioned securities.