ETF Inflows as a Barometer of Risk-On Behavior in the Post-Trade Deal Era

The global investment landscape in 2025 has been reshaped by a confluence of trade agreements, geopolitical shifts, and evolving investor behavior. As nations recalibrate their economic relationships, ETF inflows have emerged as a critical barometer of risk-on sentiment, offering actionable insights into how capital is reallocating across asset classes and geographies. For investors navigating this dynamic environment, understanding the interplay between trade developments and ETF flows is no longer optional—it's a strategic imperative.

The Trade Deal Catalyst: From Uncertainty to Confidence

The U.S.-Vietnam trade deal, finalized in early 2025, exemplifies how trade agreements can catalyze a shift in investor sentiment. Prior to its ratification, tariffs and supply chain disruptions had driven a risk-off posture, with capital fleeing volatile sectors like semiconductors and commodities. However, the deal's passage triggered a surge in equity ETF inflows, particularly into broad-based U.S. benchmarks. The Vanguard S&P 500 ETF (VOO), for instance, attracted $60 billion in net inflows year-to-date, reaching a record $680 billion in assets. This outperformance of U.S. equities underscored a renewed appetite for risk, as investors recalibrated portfolios to capitalize on stabilized trade flows and corporate earnings growth.

Meanwhile, trade agreements with emerging markets have spurred diversification away from U.S.-centric allocations. The iShares Emerging Markets ETF (IEMG) and Vanguard Europe ETF (VGK) each saw over $5 billion in inflows in 2025, reflecting a broader recognition of the outperformance of developed and emerging markets relative to the S&P 500. This trend aligns with data from VettaFi's Midyear Market Outlook Symposium, where 40% of advisors cited a preference for Developed Europe, signaling a strategic pivot toward regions with favorable trade terms.

The VIX and Investor Sentiment: A Volatility-Driven Narrative

The VIX volatility index, often dubbed the “fear gauge,” has played a pivotal role in shaping ETF flows in 2025. By June, the VIX reached over 30—a level not seen since the early 2020s—highlighting heightened macroeconomic uncertainty. This spike coincided with bearish sentiment in the AAII Investor Sentiment Survey, which recorded a one-year high of 61.9% in April. In response, investors retreated from high-volatility assets like leveraged ETFs and commodities. The Direxion Daily Semiconductor Bull 3X (SOXL), for example, faced $2.68 billion in outflows in May, as retail and institutional investors sought safer havens.

Conversely, low-volatility and defensive strategies gained traction. The iShares 0-3 Month Treasury Bond ETF (SGOV) and the JPMorgan Ultra-Short Income ETF (JPST) attracted significant inflows, reflecting a demand for short-duration, income-generating assets amid fiscal and monetary policy uncertainty. This reallocation underscores the duality of ETF flows: while trade agreements can spur risk-on behavior, volatility spikes often trigger risk-off responses, creating a dynamic interplay that investors must navigate.

Active ETFs and Thematic Investing: The New Frontiers

The rise of active ETFs in 2025 has added another layer of complexity to the risk-on/risk-off narrative. With nearly 2,000 active ETFs in the market, investors now have access to strategies that adapt to shifting trade and geopolitical conditions. The iShares AI Innovation and Tech Active ETF (BAI), for instance, attracted $2 billion in inflows, capturing enthusiasm for innovation-driven sectors. Similarly, the Avantis Emerging Markets ETF (AVEM) saw $2 billion in inflows, reflecting a growing appetite for active management in volatile markets.

Thematic ETFs, particularly those focused on AI and energy transition, have also gained traction. The iShares U.S. Thematic Rotation Active ETF (THRO) and Invesco S&P 500 Momentum ETF (SPMO) exemplify how investors are leveraging factor-based strategies to position for long-term growth. These trends suggest that post-trade deal environments are not just about broad diversification but also about strategic, sector-specific allocations.

Strategic Implications for Investors

For investors, the key takeaway is clear: ETF flows are not just a reflection of current sentiment but a predictive tool for anticipating risk-on behavior. Here are three actionable strategies:

1. Monitor Regional Trade Developments: As trade agreements with China and other partners loom, ETF inflows into Asia-focused funds like iShares MSCI China ETF (MCHI) could signal a shift in risk appetite. Investors should also watch for inflows into UK and German equities (e.g., iShares MSCI Germany ETF (EWG)), which may indicate confidence in Europe's trade prospects.

2. Diversify Across Fixed Income and Alternatives: While equity ETFs dominate inflows, short-duration and securitized debt instruments like Schwab Mortgage-Backed Securities ETF (SMBS) and Janus Henderson AAA CLO ETF (JAAA) offer diversification and income in a low-yield environment. Gold ETFs like SPDR Gold Shares (GLD) also remain a hedge against geopolitical risks.

3. Leverage Active and Thematic Strategies: Active ETFs and thematic products provide agility in volatile markets. For example, the ProShares VIX Short-Term Futures ETF (VIXY) allows investors to hedge against volatility spikes, while AI and energy transition ETFs position portfolios for long-term growth.

Conclusion

In 2025, the post-trade deal environment has proven to be a powerful driver of ETF flows, with investors recalibrating portfolios in response to shifting trade dynamics and volatility. By analyzing these flows, investors can gain early signals of risk-on behavior, enabling proactive positioning in both traditional and alternative asset classes. As global trade negotiations continue to evolve, the ability to interpret ETF data will remain a cornerstone of successful portfolio management.