Investor Rotations and Global Hotspots Reshape ETF Performance in May

Broad Themes Lose Steam as Passive and Global Bets Dominate

Exchange-traded funds (ETFs) are experiencing dramatic shifts in investor preference in mid-May 2025, with thematic strategies falling out of favor and capital flowing into more diversified or internationally focused funds. According to a Reuters report, thematic ETFs—those concentrated on niche sectors like AI, blockchain, and green energy—saw $5.8 billion in outflows in 2024, continuing a three-year decline.

Investors appear to be rebalancing toward broader, low-cost index funds, notably those tracking the S&P 500 and Nasdaq-100, which collectively attracted $170 billion in inflows. Thematic ETFs, often marked by high fees and volatile performance, are being replaced by instruments offering broader exposure and greater resilience amid macroeconomic uncertainty.

In stark contrast, active ETFs—those managed by professional investors rather than passively tracking benchmarks—are gaining traction. These funds now account for nearly 30% of ETF inflows as of Q2 2025. The rise is attributed to a growing appetite for tailored strategies, including funds that directly engage with trending sectors like cryptocurrencies and healthcare innovation.

Country-Specific ETFs Outperform as Geopolitical Winds Shift

One of the more compelling stories in the ETF space is the outsized performance of single-country ETFs. According to Investor’s Business Daily, ETFs focused on countries like Mexico, Brazil, Spain, and Germany have delivered gains exceeding 40% YTD. These returns are being driven by favorable monetary conditions, cheaper equity valuations compared to U.S. stocks, and sectoral tailwinds in banking, industrials, and tech.

Meanwhile, defense-themed ETFs are surging due to rising geopolitical tensions. Funds tracking U.S. and Asian defense contractors have seen up to 7% gains in just two weeks following heightened conflicts between India and Pakistan. Investors seeking geopolitical hedges are rotating into sectors traditionally seen as recession-proof or conflict-resilient.

Fixed-income ETFs are also making a quiet comeback. Bond ETFs brought in over $10.7 billion in inflows in early May as recession concerns waned and the Federal Reserve signaled a potential pause in rate hikes. This has led to a surge in interest in long-duration and mortgage-backed bond ETFs, especially as spreads remain attractive.

In Australia, the ETF industry is thriving. The local market is projected to surpass $300 billion in assets under management by year-end. Growth is fueled by retail investors and institutions alike, drawn to low-cost index exposure and robust returns in U.S. equities and tech-heavy indices.

As investor attention pivots globally and toward more stable asset classes, May 2025 is shaping up to be a turning point for ETF positioning and portfolio allocation strategies. With macro shifts and new inflow patterns emerging, the ETF space continues to evolve at breakneck speed.