Records Amid Confusion and Delay

The markets dislike confusion and delay. And the Trump Administration continues to disrupt norms and fuel uncertainty as it seeks a new mercantilist economic regime, using tariffs as both trade and political engines to achieve its objectives.

The frenetic and sometimes ambiguous details (including delays!) related to tariffs and reciprocal tariffs have caused a derailment in US equity exceptionalism over the past few months.

But has that derailed the momentum behind ETF inflows?

Investors Sought Hedges for Falling Growth and Rising Inflation

ETFs took in $96 billion in March — their ninth-most ever. And with a record $296 billion in Q1 combined with historical and typical seasonal trends, my model indicates total inflows could reach $1.3 trillion for 2025.

While active (+$120 billion) and low-cost ETFs (+$148 billion) in Q1 helped power headline figures, two buying behavior tactical trends emerged beneath the surface in March. Investors positioned defensively amid macro confusion and for an environment where inflation may be more stubborn than previously thought.

Fitting into both camps, gold ETFs took in $6.2 billion in March — their fourth-most ever, following February’s third-most $6.6 billion. Gold inflows have been this elevated only twice in the past 15 years, during a period of severe economic calamity ($7.2 billion in April 2020 and $6.8 billion in July 2020).

Gold ETFs’ Q1 total of $12 billion helped push the rolling-three month flows for inflation-sensitive markets to their highest since 2020 — eclipsing the inflows during the rampant inflation markets of 2021/2022 (Figure 1). Inflation-linked bond ETFs took in $1.8 billion in March, their third month in a row with inflows and longest inflow streak since 2021. Broad commodity exposures added $200 million in March, meaning that all three inflation-sensitive markets had inflows at the same time. All three also had inflows in February.

As a result, this was the first time that all three inflation-sensitive markets had back-to-back inflows at the same time since June 2021 when inflation was really perking up and about to force the Federal Reserve (Fed) into altering its policy stance.

Investors Gravitated Toward Europe

Investors grabbed their passports and headed to Europe in March. European exposures accounted for 100% of the $6.2 billion into the international-region category (Figure 2). That was European ETFs’ second-most on record — outdone only by the $7.8 billion in March 2015.

All other non-US categories also had inflows, leading to a total of more than $15 billion for this collection in March and $31 billion for the quarter.

These inflows helped tamp down the heliocentric nature of investor allocations over the past year, as US exposures have taken in 86% of all equity flows over the past 12 months. In March, the US took in only 76%, while year to date the $141 billion of inflows equates to 81% of all equity flows — the same percentage as their market share of assets.

The change in sentiment toward non-US is also evident in the rolling three-month flows (Figure 3). Heading into 2025, the US was outpacing non-US inflows by a record $248 billion. While still above the 80^th percentile, this figure is now just $101 billion and quickly mean reverting as the trend of US equity exceptionalism may be turning.

Sectors and Bonds Reflect Defensive Positioning

Dragged down by cyclical sectors’ $4 billion of outflows, sector exposures lost $3 billion of assets in March. While cyclical sectors are to blame, namely Consumer Discretionary and Energy, seven out of the 11 sectors had outflows last month.

For the year, sectors have just $885 million of inflows. This paltry total reflects the risk temperament of investors. Sectors are largely risk-on tools to express tactical views, in some cases, with leverage (e.g., options usage). Given the increase in volatility, investors’ risk positioning with sectors has been reduced.

The lack of risk taking is also evident by the flows into defensive sectors. Defensive sectors, led by Utilities, had $500 million of inflows. Health Care, driven by negative legislative headline news, was the only defensive sector with outflows.

With the Fed signaling a shallower rate cutting path and a spike in equity volatility, investors gravitated toward the short end of the curve. Short-term government funds took in $7 billion, or 75% of the entire government bond category.

Combined with the $1.8 billion into government inflation-linked bonds, the entire government universe had $11.2 billion inflows in March — 51% of all bond ETF inflows last month. A sign of defensive and inflation-sensitive positioning.

Quick Track Change or Full Stall?

This new era of macro uncertainty has seen US earnings expectations revised lower across every sector for both Q1 and 2025 overall.¹ And the new mercantilist economic policy environment also has led to US consumer sentiment falling to its lowest level since 2022, consumer inflation expectations hitting a 32-year high, and economic growth projections falling alongside reductions in corporate profitability.²

Unfortunately for the markets, there’s no quick fix for what has caused this confusion and delay-led volatility. If earnings reports show trepidation about the future, fundamentals are unlikely to offer too much of a respite.

The Fed cannot help get the market back on track either. With inflation being above trend, any preemptive cuts to offset potential weakened growth may be harder to undertake without causing harm elsewhere. In fact, Fed Chair Powell has stated that the central bank is in “no hurry” to alter its current policy stance.

If US equities’ exceptional run stalls as economic weather changes impact asset return trends, portfolio diversification across geographies, asset classes, and economic environments may help portfolios get back on track.

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