ETF investors look to diversify to soften exposure to volatility

Yasmine Raso

Senior Journalist, Financial Newswire

9 July 2025

Exchange traded fund (ETF) investors have been urged to hold steady in the face of increased economic uncertainty and market volatility, as new commentary from AXA Investment Managers (AXA IM) outlines the reasons for optimism ahead.

AXA IM’s Chief Investment Officer, Core Investments, Chris Iggo, said while a perfect storm of geopolitical tensions, America’s AAA credit rating loss, the decline of ‘US-exceptionalism’ and the ongoing impact of US tariffs may have ETF investors worried, markets are “generally in good shape away from the noise”.

“The UCITS ETF market continues to experience record growth, with $277 billion in inflows in 2024 – while 2025 is on track to hit a new high after reaching $145 billion as of the end of May,” he said.

“Within this, there has been robust demand for equity ETFs, especially European and global equities, as investors seek diversification amid the ongoing uncertainty.

“Investor demand within fixed income ETFs also continues to evolve. The asset class represents some 25% of UCITS ETF assets under management but flows are increasingly directed toward actively managed strategies – overall active ETF assets under management have soared by 24% annually since 2015, and inflows surged from $7 billion in 2023 to over $19 billion in 2024. This momentum is continuing in 2025, with $9 billion in flows already recorded.”

This comes as bonds have mostly stuck to positive territory in the year-to-date despite concerns over inflation and fiscal stability. However, the Trump administration has “weakened trust” and raised concerns for ETF investors.

“ETF investors want greater compensation for holding US assets – hence the rise in US Treasury bond yields relative to those of other countries. In fact, on most dimensions, risk premiums are increasing. While none of the bond market moves have been particularly dramatic, ETF US Treasury investors may be impacted by ongoing relative underperformance,” Iggo said.

“At the very least, unless cuts to federal spending can be meaningful, ETF investors will be faced with significant new and refinancing issuance from Washington in the next few years.

“However, corporate risk premiums have remained stable, reflecting the US economy’s underlying strength. In that respect corporate credit appears to be relatively sound. For now, any perceived deterioration in the US government’s creditworthiness has had little impact on corporate borrowing. Issuance remains healthy and demand is strong, and in our view, credit as an asset class remains on relatively stable ground.”

Iggo highlighted the equity market may pose more of a challenge “especially in terms of valuations”.

“In the US, the S&P 500 and Nasdaq have once again hit fresh peaks. The cyclically adjusted price-to-earnings ratio is almost back to record highs, and the stock market capitalisation/GDP ratio is as high as it has ever been – both indicators that the stock market could be seen as overvalued,” he said.

“However, US-listed companies have on the whole reported strong earnings recently, and forecasts for earnings growth are still in double digits for this year and next.

“The economy is not in recession and there is plenty of liquidity in money market accounts. Additionally, technology is moving quickly and given the rapid growth in artificial intelligence applications, this could be a source of exceptional growth and productivity booster in the US and beyond.

“Compared to the US, risk-adjusted returns look more attractive in other regions and the realignment of global trade and political alliances could herald an improved relative performance in Europe, Asia – because of China – and other emerging markets in the years ahead. Year to date the MSCI Asia and MSCI Europe indices have achieved impressive returns of 13% and 22% respectively.”

Iggo also encouraged ETF investors to stick with the “fundamentals” to weather the bleak economic outlook.

“The current geopolitical and economic outlook is fraught with concern. ETF investors have enjoyed very good returns from equities and credit markets are again generating decent income,” he said.

“Markets are likely to see more volatility in the weeks and months ahead. Macroeconomic risks, which have been dormant since late April, are re-emerging. This largely reflects the fact that a lot of the economic data has hinted at resiliency. Employment growth, despite having slowed, remains positive.

“The world is changing but market capitalism is not dead; it is just that the mechanisms are being shaken up. That creates uncertainty. But fundamentals are still solid for global ETF markets and the level of US confrontation should eventually recede. The VIX volatility index is at 16 and the one-to-five-year ICE Corporate Bond index is yielding 4.5% – both look good value.

“As such, balanced, diversified ETF portfolios with a solid exposure to income flows from credit, and earnings growth from technology, should potentially continue to enjoy gains.”