The robustness of the exchange-traded product market has been on full display amid the recent bout of policy-induced equity market volatility. With over 4,000 offerings, both new and decades-old offerings are attracting investors adjusting to a changing landscape.
After years of underperformance, international developed markets have come back into view for ETF investors. Several broad-based, low-cost exchange-traded funds from Vanguard Group, BlackRock, State Street Global Advisors and Schwab Asset Management, among others, have seen year-to-date returns around 10% through March 7, accompanied by a surge in both trading and net inflows.
For example, over the past three months through March 7, the $147.6 billion Vanguard FTSE Developed Markets ETF experienced $3.1 billion in net inflows and the $17.9 billion iShares Core MSCI International Developed ETF received $2.1 billion of net inflows, according to CFRA Research.
Even some currency-hedged international exposures are attracting assets, despite their utility being more appropriate in an environment where investors expect the dollar to strengthen. “We haven’t seen investors in these products for a while,” according to VettaFi Head of Research Todd Rosenbluth. For example, the $7.7 billion iShares Currency Hedged MSCI EAFE ETF added $1.9 billion in net inflows the last three months. Average daily trading volume has also doubled in the last month.
Year-to-date through March 6, iShares unhedged MSCI EAFE ETF had an 11.7% price return compared to a 7.25% for the hedged version, according to Morningstar. According to DataTrek Research, major developed economies currencies were up an average of 3.2% through March 7, while emerging economies currencies were up 2.1%.
In emerging markets, however, performance alone hasn’t been enough to gather assets. Despite year-to-date returns nearing 20% for some China equities-focused ETFs, funds have been in outflows. According to CFRA, for example, the $8.1 billion iShares China Large-Cap ETF has seen $633 million in net outflows while it returned 20.8% year-to-date.
“The tariffs are unchartered waters and there’s potential for upending the current world trade order,” said Arjun Divecha, founder of the GMO emerging markets strategy. While Divecha holds that some of the tariff proposals and discussions for countries such as Canada and Mexico have been negotiating tactics, “I don’t believe that’s true for China,” he said.
GMO recently launched its Beyond China ETF into a marketplace that already includes a handful of ex-China emerging market ETFs, led by the iShares MSCI Emerging Markets ex-China ETF with $15.2 billion in assets.
The persistence of dollar strength has kept broader emerging market returns below those of developed economies so far this year. But GMO’s Mr. Divecha sees the continued surge in gold as an indicator of relative weakness in the dollar. Even amid crypto hype and acceptance, gold has shown itself a more reliable store of value.
Gold funds have scooped up assets this year, adding $6.2 billion for a total of $144 billion in assets as gold continues its surge from 2024.
Other diversifiers remain underdeveloped
Over the past few years, a flurry of ETF launches have brought countless actively managed equity and fixed-income funds, numerous “buffered” ETFs that use options to limit downside exposure while capping gains, as well as leveraged and inverse single stock ETFs.
Many of these products, however, don’t fit well into broadly distributed models that rely on liquidity and availability of specific ETFs.
Across the market, strategists are evaluating investment portfolios that have grown heavy with the illiquidity of private equity, private credit and real estate, while benefiting from surging large-cap tech stocks in the U.S.
“Now, if we’re in for a bout of volatility, how do you trade it or protect yourself from it?” asks Jim Carroll, portfolio manager at Ballast Rock Private Wealth.
Carroll chronicles all things related to market volatility at his Vixology Substack, including the CBOE Volatility index, or VIX, which tracks the change in implied volatility on the S&P 500 stock index. Wild swings in volatility nearly put the VIX ETP complex out of business years ago.
“The size of VIX ETF ecosystem doesn’t support institutional allocators who are better off expressing views in the SPX futures and options market,” Carroll said. Moreover, “ETF products are not well-suited for managing tail risk,” he added.
And while cryptocurrency ETFs, particularly bitcoin funds, have surged in assets and attention, traditional currency pair ETFs have underwhelmed, as have individual ETFs offering access to agricultural and energy commodity markets.
A handful of managed futures ETFs, however, do attempt to access trends in commodity markets. For example, the $791 million Simplify Managed Futures Strategy ETF uses a systematic approach to agriculture and energy futures, designed by Altis Partners. This ETF has added $318 million in net flows since the beginning of the year, according to CFRA.
“There’s a new bull market in diversification,” said Paisley Nardini, managing director, portfolio manager and asset allocation specialist at Simplify Asset Management.
That sentiment is underscored by the recent launch of the SPDR Bridgewater All-Weather ETF by SSGA. The original strategy launched nearly 30 years ago is synonymous with “risk parity” and the ability to perform across market conditions, including “economic contractions and elevated inflation,” according to SSGA.
