Active Management Triumphs: Navigating Geopolitical Storms in a Tariff-War World

The escalating U.S.-China trade war, punctuated by tariff hikes, retaliatory measures, and diplomatic standoffs, has transformed global markets into a high-volatility arena. Investors are now confronting a stark reality: passive indexing strategies, which thrived in low-cost, low-volatility environments, are increasingly ill-equipped to navigate today's geopolitical and macroeconomic minefield. The data is clear: active equity funds are surging as investors prioritize agility and risk management over rigid index replication.

The Shift from Passive to Active: A Volatility-Driven Revolution

The second quarter of 2025 has marked a historic inflection point. Active ETFs attracted $9.9 billion in net inflows—outperforming passive ETFs ($9.4 billion) for the first time ever—a stark reversal of the long-dominant passive trend. This shift is no coincidence. Tariff volatility has created a “winners and losers” market, where sector-specific insights and nimble portfolio adjustments are critical.

Consider the April 2025 tariff shock: U.S. mutual funds lost $3.997 billion in just two weeks, while active ETFs thrived. Investors flocked to “cash-like” ultrashort bond ETFs and large-cap equity funds, deploying a “buy-the-dip” strategy that passive funds, tied to indices, could not execute. The May trade agreement—which temporarily reduced U.S. and Chinese tariffs from 125% to 10%—provided short-term relief but left core tensions unresolved. Active managers, with the flexibility to pivot, capitalized on sector-specific opportunities.

History Repeats: Active Outperformance in Volatile Markets

Data from prior crises confirms active management's edge. During the 2008 financial crisis, active equity funds outperformed passive peers by 3–5% annually, leveraging sector rotations and risk hedging. In 2020's pandemic-driven volatility, active funds again excelled, with 60% of large-cap active funds beating the S&P 500.

The current environment mirrors these patterns. Take the steel and appliance tariffs imposed in June 2025: a 50% duty on U.S. imports of refrigerators and washing machines hit Chinese manufacturers, but active managers could shift allocations to domestic suppliers or untariffed sectors. Passive funds, locked into index-weighted exposure, suffered. Similarly, the May agreement's exclusion of legacy Section 301 tariffs (still at 25%) means U.S. tech and manufacturing stocks remain vulnerable—a risk active managers can actively mitigate.

Infrastructure ETFs like GII, favored by active managers for their inflation resilience and government stimulus ties, have outperformed the broader market by 8% since January 2025, underscoring the value of sector specialization.

Actionable Strategies: How to Shift to Active Management

1. Allocate to Active ETFs with Defined Outcomes:
   Funds like Capital Group Dividend Value (CGDV) and defined-outcome ETFs (e.g., ProShares RAFI Long/Short) offer downside protection and asymmetric upside. These strategies attracted $3.5 billion in Q2 inflows, capitalizing on volatility.

2. Prioritize Defensive Sectors with Active Tilts:

3. Regional Banks (KRE): Undervalued at 16-year lows, they benefit from rising interest rates and regulatory tailwinds. Active managers can target undervalued institutions.
4. Global Infrastructure (GII): Exposure to government-funded projects and energy transitions provides stability.

5. Collateralized Loan Obligations (CLOs): The PGIM AAA CLO ETF (PAAA) offers high yields (5.5%) with low duration risk, ideal for income seekers.

6. Use Commodities as a Volatility Hedge:
   While passive commodity ETFs (e.g., DBC) have struggled, active managers can tactically overweight sectors like energy (tariff-exposed countries may divert supply chains) or rare earths (a key negotiation chip in U.S.-China talks).

7. Avoid Passive Exposure to Tariff-Prone Sectors:
   Sectors like semiconductors (subject to 100% Section 301 tariffs) and agriculture (targeted by Chinese retaliatory duties) are passive fund liabilities. Active strategies can underweight these while overweighting safer havens.

The Bottom Line: Active Management is Not Optional

The U.S.-China tariff war has created a market where passive replication is a liability. With tariffs set to remain a core geopolitical issue—despite temporary truces like the May agreement—investors must embrace active management to:
- Avoid index drag: Passive funds are forced to hold overvalued or tariff-hit stocks.
- Leverage sector-specific insights: Active managers can pivot to infrastructure, regional banks, or defined outcomes.
- Mitigate geopolitical risk: Active strategies can hedge against supply chain disruptions and policy shifts.

As of July 2025, active equity funds like VAEQX are outperforming the S&P 500 by 4.2%, proving that active management is no longer a “nice-to-have” but a necessity.

**Final Recommendation:

• Replace 20–30% of passive equity allocations with active funds focused on infrastructure, regional banks, and defined outcomes.
• Use CLO ETFs (PAAA) for yield while avoiding tariff-prone sectors like semiconductors.
• Monitor trade negotiations: If the U.S. and China escalate tariffs beyond July's temporary truce, active managers will have the agility to protect portfolios.

In a world where tariffs are a permanent fixture—not a temporary storm—active management is the only compass investors need.

Data as of July 7, 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.