The first quarter of the year is now behind us. The second quarter is already starting off with a bang.
The so-called “Liberation Day” on April 2 and the immediate aftermath of the unveiling of tariffs had markets deeply in the red, looking to make sense of new trade policy and its impact. Investor jitters ran high, and antacids probably rolled freely. It’s been a tough week to be an investor.
So, what happens next? We can take some portfolio positioning cues from the first quarter.
Throughout Q1, the prevailing call had been to diversify and manage risk. Many of us came into the year with highly concentrated portfolios, which now were faced with changing market conditions, questions about U.S. exceptionalism — “are we still exceptional?” — and recent leaders turned laggards. When the old playbook focused on a few winners no longer worked, all we could talk about was the importance of diversification.
When we look at Q1 ETF data, we see investors heeded the call to diversify, and ETFs helped that effort. In a market flustered with so much uncertainty, I find it reassuring when the data confirms the narratives.
The first thing that stands out in the data is the sheer size of the flows. Through thick and thin, ETFs as an investment vehicle remain the portfolio solution of choice across market conditions.
During Q1, some $300 billion in net new assets found their way into ETFs. That puts us on the path for another record year of inflows following 2024’s record $1.1 trillion. In other words, the pace of ETF adoption isn’t slowing as markets grow challenging. On the contrary, it’s speeding up.
Among the quarter’s biggest winners were ETFs offering access to classic diversifiers like gold and commodities. We saw appetite for dividends as investors looked to secure income. We saw demand for inflation protection in things like TIPS. And we tallied a lot of assets chasing international equities as a valuation-compelling diversifier. State Street Global Advisors put out an excellent note detailing ETF flows for the quarter, and my colleague Elle Fitzgerald shared the highlights. You can check them out here.
But deeper into the numbers, there were a few interesting trends that tell interesting stories about adoption and, possibly, about the path of future asset creation.
Domestic Bias Is 'Unshakable'
First, equity ETFs took in roughly 60% of all ETF asset flows in Q1. Almost 80% of that net creation landed in U.S. equity funds. That happened even as broad market indexes lost ground.
Consider that the biggest asset-gatherers in the quarter were U.S. large-cap funds like Vanguard S&P 500 ETF (VOO ) — which alone took in $35 billion in the quarter — as well as the iShares Core S&P 500 ETF (IVV ), the Vanguard Total Stock Market Index Fund ETF Shares (VTI ), the SPDR S&P 500 ETF (SPLG ), and the Invesco QQQ Trust (QQQ ).
These five ETFs alone captured about $80 billion in combined new assets while roughly half of the S&P 500 sat in the red in Q1. Some 70% of the index lost ground in March alone. To quote SSGA’s Head of Americas ETF
Research Matt Bartolini, “Domestic bias is unshakable.”
Why has the appetite for U.S. equity exposure been so resilient despite market turmoil?
“Inflows are driven by secular trends, such as the continuing adoption in broad portfolios, model allocations, and a standard view of asset allocation,” Bartolini said. “These are secular long-term drivers that are not going to be beholden to the market environment.”
“The problem investors have is that they tend to look at the past and extrapolate the same results into the future,” he explaineded. “Just because the last 10 years have been great for one asset, it doesn’t mean the next 10 years are going to be exactly the ‘same great’ for that asset.”
Q1 data shows that domestic bias remains strong and no market turmoil will derail the confidence in the long-term U.S. stock opportunity. That said, investors have been looking elsewhere with more concerted effort. Relative to asset size, broader flows into international equities and diversifiers are notable. Going into Q2, there’s no reason to expect that to change if market conditions persist.
Defined Outcome the New Low Vol Play
Challenging markets saw a return of volatility in Q1. As a category, defined outcome ETFs rose to the challenge to deliver investors a path to participation and capital preservation. Asset-gathering and growth in the space has been impressive as investors turn to these products to manage portfolio risk and volatility.
Absent from that effort, surprisingly, is low volatility ETFs. These factor funds have now faced 23 consecutive months of outflows. That’s despite that fact that low-vol has been a leading performing factor in 2025.
It bodes the question, are defined outcome ETFs the new low vol play? It looks like it.
“To use a movie analogy, in ‘There’ll be Blood,’ remember Plainview and the ‘I drink your milkshake’ scene? Buffer ETFs are drinking low vol ETFs’ milkshake,” Bartolini added.
Calling this category of funds a “more novel way” of managing low volatility in a portfolio, he says that defined outcome ETFs have been compelling for their structured payouts and downside protection relative to a traditional low vol approach, which can be highly correlated to the broader market.
In an environment where diversification is crucial, defined outcome ETFs may be emerging as the preferred path to lower portfolio volatility. This is a trend that’s young, and we’ll be watching closely as it evolves.
Active Is Shining, Especially the Traditional Kind
One final data point that stands out in Q1 ETF flows is the appetite for actively managed ETFs of the most traditional sort — the long-only equity ETF.
Active ETFs across the board have had a stellar year. Demand is robust for active management. Product development equally so. And today, there are many flavors of active for investors to choose from.
SSGA data breaks down the active equity asset class into 16 categories. These include traditional and nontraditional outcome-oriented strategies. In Q1, the single biggest asset-gathering category was traditional long-only equity active ETFs. They took in about 40% of all active equity ETF flows.
Before we collectively gasp at the notion that stock picking is new favorite thing in the traditionally passive ETF world, Bartolini offers some context.
For starters, ETF asset flows only show one side of the allocation equation; namely, the ETF side. Some of the asset creation taking place in traditional long-only active equity ETFs is at the expense of mutual fund outflows. At face value, “It’s an unfair representation of buying behavior,” he says.
What’s more, some of this appetite for traditional long-only active is at the expense of smart beta multifactor strategies.
“In active equity ETFs, investors aren’t necessarily going for alpha. A lot of these active ETFs are portfolios with thousands of holdings,” Bartolini noted. “They are going for enhanced equity exposure. They’re going for efficiency, for premia, for outcomes, for income, for less volatility, for customization.”
He also notes that while long-only active equity leads, nontraditional and/or alternative active ETFs — funds like defined outcome, hedged equity and allocation ETFs — are all among the rising tide of active management. These categories are growing rapidly.
As we continue to navigate uncertainty and stomach volatile market action, some of these allocation trends look set to remain in place for now, at least as we kick off Q2.
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