US-listed ETF inflows cool in March as geopolitical risks reshape investor playbook

Investor demand for US-listed ETFs lost momentum in March as geopolitical tensions and rising yields pushed markets into a more cautious stance, according to State Street Investment Management’s latest flow data.

ETF inflows totalled $104 billion during the month, well below recent trends and roughly 40% lower than the six-month average, highlighting a pullback in risk appetite as volatility climbed.

The slowdown came amid a broad market selloff, with global equities dropping more than 7% and bond yields climbing close to 40 basis points as conflict in the Middle East fuelled inflation concerns and policy uncertainty.

While investors continued to allocate capital, the data suggests a more selective and defensive approach. Only half of ETFs recorded inflows in March, a notable decline from roughly 70% participation seen in prior months.

Flows into equities remained resilient overall, but with a shift in preference. US-focused equity ETFs gathered $39 billion, while non-US exposures attracted $31 billion, signalling growing interest in geographic diversification as risks mount.

However, beneath the surface, appetite for more targeted international exposures weakened, with emerging markets and single-country funds seeing net outflows—pointing to reduced conviction in higher-risk segments.

Sector allocations

Sector allocations reflected a clear risk-off tone. Broad sector ETFs experienced $5 billion in redemptions, ending a 10-month streak of inflows. Technology led the declines, shedding $3.3 billion amid concerns over valuations and the sustainability of AI-driven growth.

In contrast, energy emerged as a standout beneficiary. The sector pulled in a record $5 billion during March, extending a 14-week inflow streak as investors positioned for higher oil prices and supply disruptions tied to geopolitical tensions.

Defensive plays also gained traction, with utilities attracting $1.1 billion as investors sought shelter in areas historically more resilient during economic slowdowns.

Interest in defence-related exposures surged as well, with aerospace and defence ETFs recording $3 billion in inflows—the highest monthly total on record—reflecting expectations of sustained global military spending.

Bond ETF flows reinforced the defensive repositioning. Fixed income funds drew $42 billion in March, led by a surge into short-term government bonds, which captured a record $29 billion.

At the same time, investors pulled back from longer-duration debt, with long-term government bond ETFs seeing outflows of roughly $3 billion as rising yields and inflation risks weighed on returns.

Credit-sensitive areas also faced pressure, with $6 billion exiting sectors such as high yield and emerging market debt.

Inflation-linked bond ETFs continued to attract steady demand, extending a prolonged streak of inflows and underscoring persistent concerns about price pressures.

Commodity flows painted a more nuanced picture. While gold-related ETFs experienced heavy redemptions—losing $13 billion as prices fell—broader commodity funds continued to attract capital.

Broad-based commodity ETFs recorded $1.3 billion in inflows, marking their 10th consecutive month of gains, suggesting investors are still looking for inflation hedges and diversification tools despite short-term volatility.

Lacking clarity

State Street’s report likened the current market environment to a test with incomplete information, where investors must make decisions without full clarity.

“Today’s markets resemble a multiple-choice exam with 20 questions, but only 10 answers covered in the study guide. Investors must commit to views with incomplete information. A correct answer (a relief rally), is immediately followed by two new questions in response to the frenetic news cycle. Is this an achievable endpoint? Will the rally last? Progress is possible, but absolute clarity remains elusive.”

With earnings expectations rising even as macro risks intensify, the report suggests markets remain fragile, with investors likely to favour diversification and defensive positioning until clearer signals emerge.