ETFs Set to Break Records with $1.3 Trillion Inflows in 2025

U.S. Investors Continue to Favor ETFs Amid Mixed Market Conditions

Investors continue to show strong interest in exchange-traded funds (ETFs), with recent data highlighting a mix of cautious risk-taking and a growing appetite for international diversification. According to Matthew Bartolini, head of ETF research for the Americas at State Street Investment Management, U.S.-listed ETFs saw $121 billion in inflows during July alone. This brings the total for the year to $677 billion, setting the stage for a potential record of $1.3 trillion by 2025.

Despite some signs of a “risk-on” market, particularly in cyclical sectors, there has been a notable trend of outflows from U.S. small-cap stocks. Bartolini noted that this marks the longest stretch of negative activity for small-cap equity ETFs, with seven consecutive months of outflows. This suggests that while investors are willing to take on some risk, they remain wary of certain segments of the U.S. market.

International exposure has also seen increased interest, especially in light of concerns over potential trade policies under the Trump administration. Bartolini pointed out that U.S.-listed ETFs focused on international stocks accounted for about 30% of equity inflows in July, despite making up only 19% of the total equity assets under management. This indicates a shift toward diversifying beyond domestic markets.

The performance of major indices highlights this divergence. The S&P 500, which tracks large-cap U.S. equities, gained 7.8% through July, while the Russell 2000, a gauge of small-cap stocks, declined by 0.8%. Meanwhile, international stocks have outperformed the S&P 500, with the iShares MSCI ACWI ex-U.S. ETF rising 15.5% over the same period.

Tariffs and Economic Uncertainty

Investors have been closely watching the impact of tariffs on the economy, with recent announcements of higher levies adding to uncertainty. David Mericle, chief U.S. economist at Goldman Sachs, noted that the new “reciprocal” tariff rates for most trading partners are generally higher than the 10% baseline rate that has been in effect since April. While these rates may be negotiated down in the coming weeks, the overall effect is expected to be slightly higher than previously anticipated.

Tariffs have raised concerns about their potential to slow economic growth and drive up inflation. This uncertainty has led to increased scrutiny of the labor market, where recent reports suggest a slowdown. The Bureau of Labor Statistics reported weaker-than-expected job growth in July, with significant downward revisions to previous months’ data. Russell Price, chief economist at Ameriprise Financial, described the labor market as “weak,” suggesting that the report could influence the Federal Reserve’s decision on future rate cuts.

Fed's Stance and Market Reactions

The Federal Reserve, after its latest meeting, acknowledged that economic growth moderated in the first half of the year but maintained that the labor market was still “solid.” However, Fed Chair Jerome Powell highlighted “downside risks” to the labor market, signaling caution. Despite the weak jobs report, the Fed decided to keep its benchmark interest rate unchanged at the current target range of 4.25% to 4.5%.

Following the jobs data, Treasury yields fell sharply, with the 2-year yield seeing a steeper decline than the 10-year yield. However, the U.S. stock market rebounded, with the S&P 500 closing 1.5% higher on the day.

Bond Market Attracts Strong Inflows

In addition to equities, investors have shown a strong preference for fixed-income products in 2025. State Street research found that bond ETFs reached $200 billion in inflows for the year at an unprecedented pace. This is faster than the $200 billion milestone achieved in 2024, which took until September to reach.

Elevated yields in the bond market have drawn investors, with BlackRock’s Tom Becker noting that interest rates in this cycle are likely to remain higher than in the previous one. He also highlighted the benefits of hedged global bonds, which can offer better returns in environments where U.S. cash rates are high relative to other countries.

Active Bond ETFs Gain Popularity

Investors are increasingly turning to actively managed bond ETFs to navigate the complexities of the global fixed-income market. Bartolini noted that active bond ETFs received about 60% of all flows into U.S.-listed fixed-income ETFs last month. While their assets represent a smaller portion of the industry’s total fixed-income holdings, their growing popularity signals a shift in investor strategy.