ETF Market Faces Challenges Amid Regulatory Scrutiny and Geopolitical Shifts

ETF Market Faces Challenges Amid Regulatory Scrutiny and Geopolitical Shifts

The exchange-traded fund (ETF) market is currently navigating a complex landscape marked by regulatory scrutiny and geopolitical developments. These factors are influencing investor strategies and the evolution of ETF offerings.

Regulatory Scrutiny on Active ETFs

Investment managers are under increased scrutiny for promoting ETFs as actively managed while closely mirroring benchmark indices. This practice, termed “shy active” by Morningstar, has raised concerns about transparency and the true nature of active management. A survey by Carne Group revealed that 88% of wealth managers and institutional investors believe these ETFs fail to meet their active management claims. The lack of significant deviations from benchmarks and minimal stock-picking strategies have led to calls for greater transparency and authenticity in active ETF offerings. New semi-transparent structures introduced in Luxembourg and Ireland aim to encourage genuinely active fund strategies by protecting trade confidentiality. Experts emphasize the importance of transparency and investor awareness regarding the true nature of these ETFs. Despite criticisms, some argue that low tracking error funds can be useful if their strategies and performance metrics are clearly disclosed. The active ETF market in Europe remains nascent, but anticipated regulatory changes may lead to more authentic offerings in the near future. (ft.com)

Geopolitical Tensions Drive Defense-Focused ETFs

In response to escalating geopolitical tensions and increased defense spending by European governments, major global asset managers such as BlackRock and BNP Paribas have launched new ETFs focused on Europe’s defense industry. These funds aim to capitalize on the continent’s rearmament efforts, spurred in part by calls for Europe to become less reliant on American military support. Over the past seven months, at least nine Europe-focused defense ETFs have been introduced, reflecting a recent trend in a market that already offers more than 50 defense ETFs globally. So far in 2025, investors have injected $8.4 billion into defense ETFs, with $2.7 billion directed toward the European-focused variants, more than double the total investment for all of 2024. BlackRock’s new ETF was listed in Amsterdam and Frankfurt, while BNP Paribas’ ETF is already listed in Paris and will soon be listed elsewhere in Europe. These funds typically include companies within European NATO member states. The surge in defense stock values has encouraged more money managers to enter this space, including firms like Allianz and UBS, which have relaxed previous restrictions on defense investments. (reuters.com)

China’s Consideration to Open ETF Market to Western Firms

China is considering granting access to Western firms like Citadel Securities, Jane Street, and possibly Optiver to operate as market makers in its $520 billion ETF market. This move could enhance trading efficiency and reduce costs due to the experience international firms bring in providing ETF liquidity. Over the past two years, China has expanded its ETF sector significantly, growing 134% to become Asia Pacific’s second-largest behind Japan. Despite the growth, ongoing U.S.-China trade tensions, including recent U.S. tariffs of 145% on Chinese goods, may delay approval for U.S. firms. Market makers offer continuous buying and selling prices for ETF shares, enabling smooth trading, and licensed market makers in China benefit from reduced fees and trading restrictions. Citadel has already applied to establish a brokerage unit in China, though none of the firms or China’s securities regulator has publicly commented. While China has opened more of its financial sector to foreign firms in recent years, geopolitical tensions and economic slowdown have led firms like Fidelity, Morgan Stanley, and Legal & General to scale back their operations in the country. (reuters.com)

Market Performance of Key ETFs

As of May 31, 2025, several major ETFs have experienced slight declines:

• SPDR S&P 500 ETF Trust (SPY): $589.39, down 0.078% from the previous close.
• Vanguard S&P 500 ETF (VOO): $541.76, down 0.046% from the previous close.
• Invesco QQQ Trust Series 1 (QQQ): $519.11, down 0.112% from the previous close.
• iShares Russell 2000 ETF (IWM): $205.07, down 0.495% from the previous close.
• iShares MSCI Emerging Markets ETF (EEM): $45.52, down 1.27% from the previous close.

These movements reflect the broader market’s response to current economic and geopolitical uncertainties.

Conclusion

The ETF market is at a crossroads, facing challenges from regulatory scrutiny over active management claims and adapting to geopolitical shifts influencing investment strategies. Investors are advised to stay informed and consider these factors when making investment decisions.