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Equity ETFs Lead Inflows, but Investors Still Seek Safety

Isaac LaneMonday, Apr 21, 2025 7:48 pm ET

59min read

The first quarter of 2025 saw equity ETFs attract robust inflows, driven by investor confidence in diversified market exposure. Yet, beneath the surface, a paradox persists: as equity markets stumbled, investors simultaneously flocked to safe-haven assets like gold and ultra-short Treasury ETFs at record levels. This dual dynamic reflects a market caught between growth optimism and deepening uncertainty—a tension likely to define investment strategies for the foreseeable future.

Equity ETFs: Growth Amid Volatility

Equity ETFs posted $108.53 billion in net inflows during Q1 2025, surpassing the previous record set in 2021. Investors favored broad-market exposure, with the iShares Core S&P 500 ETF (IVV) leading with $23.6 billion in net new assets. Tech-sector ETFs also thrived despite sector-wide declines, exemplified by the iShares Expanded Tech-Software Sector ETF (IGV), which added $1.5 billion. European equities, such as the iShares MSCI Germany ETF (EWG), saw inflows as investors bet on regional recoveries.

Yet this optimism contrasts with the S&P 500’s worst quarterly drop since 2022, down 4.3%. The disconnect underscores a strategic shift: investors are prioritizing strategic allocations over chasing returns, with active equity ETFs capturing nearly half of total flows.

The Rise of Safe-Haven Assets

While equity ETFs dominated, investors simultaneously rushed to defensive assets. Gold ETFs like the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) saw $15 billion in Q1 inflows, pushing gold prices to an all-time high with a 15.3% YTD return. Ultra-short Treasury ETFs, such as the iShares 0-3 Month Treasury Bond ETF (SGOV), attracted over $22 billion, benefiting from yields of ~4.5%—a stark contrast to near-zero savings account rates.

These flows reflect a market gripped by geopolitical tensions and tariff-driven stagflation fears. New tariffs on $300 billion in goods, combined with geopolitical risks, have fueled demand for assets offering liquidity and capital preservation. Gold’s negative correlation with equities (-0.35) further cemented its role as a portfolio diversifier.

Investor Sentiment: Caution Dominates

Q2 2025 has deepened the cautious tone. While equity ETFs like the VanEck Semiconductor ETF (SMH) saw surges during dips, broader sentiment remains constrained by economic uncertainty. Corporate bond spreads widened as tariffs pushed U.S. import costs to record highs, while the Federal Reserve’s reluctance to cut rates despite slowing growth has left markets in limbo.

The tech sector’s resilience contrasts sharply with financials, which face their weakest inflows since October 2024. Regional banks, despite strong earnings, have underperformed as investors worry about credit risks and economic slowdowns. Meanwhile, digital assets like Bitcoin faced a $1.5 billion hack and regulatory scrutiny, contributing to a 12% Q1 decline.

Strategic Allocation in a Late-Cycle Market

Advisors are now emphasizing risk-aware portfolios. A typical allocation might include:
- 10–15% in gold ETFs to hedge against inflation and geopolitical risks.
- 15–25% in ultra-short Treasuries for liquidity and yield.
- Core equity exposure through broad-market ETFs, balanced with low-volatility strategies.

The data supports this approach: ultra-short Treasuries offer near-zero default risk and outperform cash, while gold’s diversification benefits are statistically robust. Even as equity inflows remain strong, the $450 billion in safe-haven AUM signals enduring demand for downside protection.

Conclusion: Growth and Safety in Tension

Investors in 2025 face a market caught between two poles: the allure of equity growth and the necessity of capital preservation. Equity ETFs will likely remain a cornerstone of portfolios, but their success hinges on navigating a landscape where tariffs, inflation, and geopolitical risks are constants.

The numbers tell the story: equity inflows hit a record $108.53 billion, yet safe-haven assets grew to $450 billion—a 12% increase from 2024. The Federal Reserve’s hesitation to cut rates, coupled with the S&P 500’s volatility, underscores why investors are hedging.

For now, the optimal strategy is clear: allocate to equities strategically, but always keep a safety net. Whether through gold, short-term Treasuries, or defensive sectors, portfolios must balance growth ambition with the reality of late-cycle risks.

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