Investment Institute
ETFs

Investors’ appetite for ETFs and market performance remain upbeat despite uncertainty

KEY POINTS

Although the macroeconomic backdrop remains concerning, the UCITS ETF market continues to enjoy record growth
Despite the market volatility, fixed income and equity indices have delivered solid year-to-date returns
Compared to the US, risk-adjusted returns look more attractive in other regions

Exchange-traded fund (ETF) investors have faced a significant increase in global economic uncertainty in 2025. But while the market backdrop of the past six months has been beset by volatility, we believe there are reasons for ETF investors to be optimistic for the months ahead.

Certainly, there has been plenty to contend with: Middle East tensions which have significantly escalated; America’s AAA credit rating loss; the decline of so-called ‘US exceptionalism’; and the trade war, with sweeping new tariffs unveiled on 2 April – ‘Liberation Day’.

The global geopolitical and economic discourse has become confrontational, and this creates uncertainty for ETF investors. However, as this trade war evolves - and while it is certainly a macroeconomic shock - the reality is perhaps less harsh than the rhetoric.

Away from the noise, markets are generally in good shape – bonds are delivering steady income to investors while equities have also enjoyed solid gains, especially in Europe and Asia. 


ETF market powers on

The febrile environment has not diminished investors’ appetite for ETFs. The UCITS ETF market continues to experience record growth, with $277bn in inflows in 2024 – while 2025 is on track to hit a new high after reaching $145bn as of the end of May.1

Within this, there has been robust demand for equity ETFs, especially European and global equities, as investors seek diversification amid the ongoing uncertainty.

Investor demand within fixed income ETFs also continues to evolve. The asset class represents some 25% of UCITS ETF assets under management but flows are increasingly directed toward actively managed strategies – overall active ETF assets under management have soared by 24% annually since 2015, and inflows surged from $7bn in 2023 to over $19bn in 2024. This momentum is continuing in 2025, with $9bn in flows already recorded.

Bonds on track

Year to date, global bond returns have been mostly positive - government and high yield bonds are each up 7%.2  Fears over fiscal stability and inflation have caused concerns, but this has not altered the fact that they are delivering income to investors. For all the talk about bond market jitters, benchmark yields remain in well-defined ranges.

But US government actions have weakened trust; ETF investors want greater compensation for holding US assets - hence the rise in US Treasury bond yields relative to those of other countries. In fact, on most dimensions, risk premiums are increasing. While none of the bond market moves have been particularly dramatic, ETF US Treasury investors may be impacted by ongoing relative underperformance.

At the very least, unless cuts to federal spending can be meaningful, ETF investors will be faced with significant new and refinancing issuance from Washington in the next few years.

However, corporate risk premiums have remained stable, reflecting the US economy’s underlying strength. In that respect corporate credit appears to be relatively sound. For now, any perceived deterioration in the US government’s creditworthiness has had little impact on corporate borrowing. Issuance remains healthy and demand is strong, and in our view, credit as an asset class remains on relatively stable ground.

At a tactical level, the summer might be a period of bond market outperformance. The expectation is that demand for credit remains very strong and that corporate credit problems and defaults in the high yield market remain rare - we believe short-duration credit in investment grade and high yield are sweet spots in this uncertain world. Spreads might be tight, but yields are attractive at some 5% for US investment grade and more than 7% in high yield.3

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Equities hold their nerve

What may be of more concern is the equity market – especially in terms of valuations. In the US, the S&P 500 and Nasdaq have once again hit fresh peaks.4  The cyclically adjusted price-to-earnings ratio is almost back to record highs, and the stock market capitalisation/GDP ratio is as high as it has ever been – both indicators that the stock market could be seen as overvalued.

However, US-listed companies have on the whole reported strong earnings recently, and forecasts for earnings growth are still in double digits for this year and next.

The economy is not in recession and there is plenty of liquidity in money market accounts. Additionally, technology is moving quickly and given the rapid growth in artificial intelligence applications, this could be a source of exceptional growth and productivity booster in the US and beyond.

Compared to the US, risk-adjusted returns look more attractive in other regions and the realignment of global trade and political alliances could herald an improved relative performance in Europe, Asia – because of China - and other emerging markets in the years ahead. Year to date the MSCI Asia and MSCI Europe indices have achieved impressive returns of 13% and 22% respectively.

Looking ahead

The current geopolitical and economic outlook is fraught with concern. ETF investors have enjoyed very good returns from equities and credit markets are again generating decent income.

Markets are likely to see more volatility in the weeks and months ahead. Macroeconomic risks, which have been dormant since late April, are re-emerging. This largely reflects the fact that a lot of the economic data has hinted at resiliency. Employment growth, despite having slowed, remains positive.

The world is changing but market capitalism is not dead; it is just that the mechanisms are being shaken up. That creates uncertainty. But fundamentals are still solid for global ETF markets and the level of US confrontation should eventually recede. The VIX volatility index is at 16 and the one-to-five-year ICE Corporate Bond index is yielding 4.5% - both look good value.5

As such, balanced, diversified ETF portfolios with a solid exposure to income flows from credit, and earnings growth from technology, should potentially continue to enjoy gains. 

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    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.


    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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