Market fluctuations put strategic positioning in the spotlight

• Equity markets have swung wildly in 2025, punctuated by the significant drop in early April. Since then, a strong rebound has them back in positive territory for the year. Sometimes, the most effective strategy during such volatile periods is to simply stay the course—and maybe even take a nap. If investors ignored the market turmoil and took a mini-Rip Van Winkle, falling asleep in mid-March and waking up in early May, they would have found that returns were roughly flat, none the wiser to all the fluctuations. That said, investors should not sleep on their diversification and strategic positioning.
• ETF flows typically mirror market performance, with strong markets historically driving robust ETF flows. In May, however, ETF flows didn’t follow their usual pattern. While ETF flows began the year on a strong trajectory and are still on pace for a record year, activity has been subdued since April 7. Up to that date, daily flows averaged $4.8 billion, but they have averaged just $3.4 billion since. Notably, active ETF flows have been more resilient, with flows down 19% compared to the 35% drop in passive ETF flows.
• During May, ETF flows shifted toward higher beta strategies, including digital assets, large growth, and emerging market ETFs. Within fixed income, credit and interest rate-sensitive areas like long duration attracted the majority of flows—a significant reversal from the first four months of the year, when most flows went toward ultrashort bond and gold ETFs.
• Still, a significant amount of cash is on the sidelines. Berkshire Hathaway, for example, owns about 5% of all short-term Treasuries, indicating that the Oracle of Omaha is waiting for a better entry point. The caution is warranted, with factors like uncertain tariff policies and low consumer confidence looming over U.S. equities. 

Guide to ETFs featured slide of the month (slide 35)

Investors diversifying into European ETFs

We believe that the environment makes diversification and active management more crucial than ever. U.S. equities face several challenges in 2025, including high valuations, high volatility, and economic policies that are likely to slow growth, increase deficits, and modestly raise inflation. Also, weak demand growth suggests slower corporate profits and higher interest rates, potentially pressuring mega-cap U.S. equities and U.S. dollar performance.

For investors, value-oriented equities, fixed income and alternative assets can be effective portfolio diversifiers. International equities can be another compelling option. So far this year, over $10 billion has flowed into European equity ETFs, marking a significant shift in sentiment away from U.S. markets following the presidential election last November.