ETFs Are on Track to Raise a Record $1.3 Trillion in 2025. Here's Where the Money Goes

Investor demand for exchange-traded funds (ETFs) continues to surge, with July’s inflows highlighting both a cautious approach toward U.S. markets and a growing interest in international diversification.

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According to State Street Investment Management, U.S.-listed ETFs attracted $121 billion in July alone, bringing total inflows for the year to $677 billion. At this pace, ETF investments could set a new annual record of $1.3 trillion in 2025, said Matthew Bartolini, head of ETF research for the Americas.

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Bartolini noted that while some investors are tactically allocating capital to cyclical equity sectors, suggesting a modest “risk-on” stance, there’s also evidence of caution. U.S. small-cap stock ETFs posted their seventh consecutive month of outflows, marking the longest stretch of withdrawals on record.

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Meanwhile, heightened trade tensions especially President Donald Trump’s “liberation day” tariffs announced on April 2 have led investors to diversify overseas. “Flows show a clear appetite for international exposure,” Bartolini said. U.S. listed ETFs focused on non-U.S. equities drew 30% of July’s equity inflows, despite accounting for only 19% of total equity assets under management.

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This shift has been partly performance-driven. While the S&P 500 rose 7.8% through July, it lagged behind the 15.5% gain of the iShares MSCI ACWI ex-U.S. ETF, which tracks global equities outside the U.S. In contrast, the Russell 2000 a benchmark for small-cap U.S. stocks fell 0.8% over the same period.

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Bartolini explained that while U.S. large-cap stocks have rebounded since early tariff announcements, it’s “not a full risk-on environment.” Persistent small-cap outflows suggest investors remain wary of domestic economic pressures.

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Tariff policy continues to shape market sentiment. Goldman Sachs chief U.S. economist David Mericle reported that most countries without trade agreements now face tariff rates higher than the 10% baseline introduced in April. Mericle expects the average rate to settle closer to 15% by August but anticipates some reductions as negotiations progress.

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Markets worry that elevated tariffs could dampen growth and fuel inflationary pressures.

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The Federal Reserve’s July 30 meeting acknowledged that U.S. growth slowed in the first half of the year. While the labor market was described as “solid,” inflation remained “somewhat elevated.” Fed Chair Jerome Powell highlighted “downside risks” to employment during his press conference.

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Those concerns deepened after the Bureau of Labor Statistics reported on August 1 that July job creation fell short of forecasts, with notable downward revisions to previous months. Nicholas Colas, co-founder of DataTrek Research, noted this challenges Powell’s earlier confidence in government labor data, which has guided the Fed’s cautious approach to rate cuts.

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As expected, the Fed left interest rates unchanged at 4.25% to 4.5%, but the weak jobs report prompted Treasury yields to decline. The 2-year yield dropped more sharply than the 10-year, signaling growing expectations for a potential rate cut in September. Russell Price, chief economist at Ameriprise Financial, described the labor data as “weak” and evidence of a deteriorating job market.

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Amid this uncertainty, investors have been piling into bonds at an unprecedented pace. Fixed-income ETFs drew over $200 billion in inflows this year, hitting that milestone faster than in 2024, when it wasn’t reached until September. Last year set an all-time record for bond ETF flows, and 2025 is on track to surpass it.

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Strong inflows reflect the appeal of higher yields. Tom Becker, senior macro portfolio manager at BlackRock, expects rates to remain elevated compared with prior cycles. However, he cautioned that large fiscal deficits and inflation above the Fed’s 2% target could mean real Treasury yields occasionally trail those available from hedged foreign bonds.

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Becker, who manages the actively run iShares Global Government Bond USD Hedged Active ETF, said currency-hedged global bonds can offer a “yield uplift.” Historically, these strategies have outperformed when U.S. cash rates exceed those in other economies.

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Investors are increasingly turning to actively managed bond ETFs to navigate complex global fixed-income markets. In July, active strategies captured 60% of all fixed-income ETF inflows, even though they represent a smaller portion of total industry assets. Bartolini called this “a clear sign of growing adoption,” reflecting a preference for more flexible management during volatile market conditions.

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With ETF inflows on track for record highs and international equities outperforming U.S. benchmarks, investors appear focused on diversification and income opportunities while remaining cautious about domestic small-cap exposure.

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As trade tensions, Federal Reserve policy decisions, and labor market trends continue to shape sentiment, ETFs particularly fixed income and global equity funds are likely to remain a cornerstone of investor portfolios in 2025.

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