Navigating the Storm: Finding Resilience in Equity Outflows

The second quarter of 2025 has seen global equity markets grapple with a perfect storm of profit-taking and macroeconomic uncertainty, fueled by trade policy volatility, geopolitical tensions, and concerns over debt sustainability. Equity ETFs alone faced $14.92 billion in outflows through early June, while bond ETFs attracted $14.59 billion—a stark shift toward safety. Yet within this turmoil, certain sectors and regions have emerged as resilient anchors for investors seeking stability. This article dissects the outflows, identifies sectors poised to withstand the headwinds, and outlines strategic entry points for cautious capital.

The Outflow Dynamic: A Flight from Growth, a Surge for Defensives

The Q2 outflows reflect a broader rotation away from growth-oriented equities and toward defensive assets. Domestic equities bore the brunt, with $12.96 billion fleeing U.S.-focused funds, as investors grew wary of tariff-driven volatility and policy uncertainty. Meanwhile, bond ETFs—particularly ultrashort maturities—saw inflows, signaling a search for yield and capital preservation.

Sectors That Defy the Tide

Amid the outflows, three sectors stand out for their resilience: software, global infrastructure, and regional banks.

1. Software: Discounted Valuations and AI's Hidden Engine

Software stocks, though down 10% in Q1, now offer compelling valuations amid a secular boom in AI adoption. The SPDR S&P Software & Services ETF (XSW), which tracks companies like Salesforce and Adobe, has quietly gained momentum as investors bet on AI monetization. For instance, Salesforce's Agentforce platform—leveraging “agentic” AI—has already sparked new revenue streams.

Why it's resilient: Software's low correlation with cyclical downturns and its role in efficiency gains make it a hedge against macro uncertainty. XSW's equal-weight structure also tilts toward smaller, innovation-driven firms, amplifying upside potential.

2. Global Infrastructure: Inflation's Shield and Geopolitics' Playground

Infrastructure stocks, particularly those tied to energy security and digital transformation, have become a haven for capital. The SPDR S&P Global Infrastructure ETF (GII) targets companies like NextEra Energy and Vinci, which benefit from regulatory tailwinds. EU initiatives funding green energy and U.S. grid modernization needs are fueling demand.

Why it's resilient: Infrastructure's defensive nature—driven by stable cash flows and inflation protection—aligns with investor priorities. Geopolitical risks, such as energy supply disruptions, further justify allocations here.

3. Regional Banks: Undervalued and Underappreciated

Regional U.S. banks, represented by the SPDR S&P Regional Banking ETF (KRE), are trading at 16-year lows—a stark disconnect from their robust fundamentals. These banks, insulated from tariff impacts due to domestic lending focus, benefit from rising net interest margins and regulatory tailwinds like reduced capital requirements.

Why it's resilient: Their low valuations underprice the potential for multiple expansion in a pro-growth policy environment. Buybacks and loan growth further support their outlook.

Regional Opportunities: Europe's Bargain and Asia's AI Gambit

While the U.S. equity market stumbled (-4.3% in Q1), Europe and Asia offered pockets of outperformance.

• Europe: German infrastructure spending, a declining euro, and potential ECB rate cuts have made European equities a bargain. The iShares MSCI EMU ETF (EZU) captures this value, with forward P/Es at a 15% discount to the S&P 500.
• Asia: China's tech sector, despite trade tensions, is a long-term AI play. Companies like DeepSeek (developer of low-cost AI models) are emerging as disruptors. Pair this with Japan's focus on AI-driven healthcare and robotics for a diversified tech exposure.

The Active Edge: Why ETFs Are the New Active Managers

The shift toward active strategies is clear: $30.2 billion flowed into active ETFs in Q1, outpacing passive products. Defined-outcome ETFs, such as the PGIM Defined Outcome ETF (PGDN), offer volatility management, while sector-specific funds like Capital Group Dividend Value ETF (CGDV) exploit value gaps.

Strategic Entry Points

1. Software: Deploy 20% of equity exposure to XSW for AI-driven growth.
2. Infrastructure: Allocate 15% to GII for inflation hedges and geopolitical resilience.
3. Regional Banks: Use KRE to capture undervalued U.S. financials.
4. Bond Buffer: Pair equity bets with ultrashort bond ETFs (e.g., SPDR Portfolio Short Term Corporate Bond ETF (SPSB)) for stability.

Conclusion: Caution Meets Conviction

The Q2 outflows underscore a market in transition—one where defensive sectors and active management rule. Investors should prioritize resilience over growth, leveraging ETFs to navigate volatility. While the near-term outlook remains uncertain, sectors like software, infrastructure, and regional banks offer a roadmap to weather the storm and position for recovery.

In this era of macro turbulence, the smartest plays lie in the sectors that defy the headwinds—and the ETFs that channel them.

Jeanna Smialek is a seasoned financial analyst specializing in global equity dynamics. Her insights blend macroeconomic trends with granular sector analysis to guide strategic investment decisions.