Talking Heads – ETF flows and trends in a world in flux

Talking Heads podcast with Daniel Dornel on ETF flows and trends

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing macroeconomic developments and how those have been reflected in ETF markets. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Daniel Dornel, Head of ETF Research. Welcome, Danielle, and thanks for joining me.

Daniel Dornel: Hi Daniel, thank you for inviting me.

DM: Let’s start with the evolution we’ve seen in the markets and in macroeconomic expectations. At the beginning of November, prior to the US election, the expectations were for a nice soft landing, meaning you would see a slowdown in growth in the US, inflation moves back towards target and the Fed starts to cut rates. The first change that occurred with Trump’s victory. We anticipated a lot of pro-growth policies that would keep US growth strong. During the first quarter of this year, we started to see marginally weaker economic data and weakness in equity prices reflecting that slower growth. We’ve had volatility since on the tariff front. These announcements are taking place now in a context where US economic growth was slowing. The other thing that we saw was very strong performance from European equity markets, reflecting a rebound in sentiment. Now with the tariff announcements, Europe, along with most equity markets, has been taking a step back. So, Daniel, when you look at how ETF flows have evolved over the last several months, let’s start with Europe.

DD: Since the beginning of February, we have seen a switch in terms of investor interest. US equity flows stopped. In the meantime, European equity products surged, and February was a record month with over 8 billion (euro) in flows for European ETFs. It was better in March with just under 14 billion (euro) in flows in European equity ETFs. This makes it the largest quarter for European equities with just under 25 billion (euro).

DM: We’ve seen then very strong inflows in European equities in the first quarter. Any expectations on whether those inflows are going to persist?

DD: It’s very difficult to forecast what’s going to happen. But if we look at what has happened since the end of March, we have seen a continuing trend of outflows on US equities. In the meantime, global developed market equities and European equities are still on the positive trend. Overall, we had like 1.5 billion (euro) in inflows, led by eurozone equities.

DM: Do you see any other patterns, if I’m thinking about thematic strategies – defence ETFs ? Are you seeing a lot of movement in those areas?

DD: If we are thinking about the other interesting trends on the market, first on the equity side, we have seen strong interest on emerging market equities and especially China. We’ve had a record quarter in Q1 2025 with over 4 billion inflows in Chinese equity ETFs. The second big trend in the equity space: thematic. It was a very strong quarter for thematic ETFs, the strongest one since Q1 2021. We have seen 4.5 billion inflows into thematic ETFs, dominated by defence. This is a trend that has picked up. If we move away from equities and we are thinking about fixed income, we have seen in Q1 14 billion in inflows, dominated by ultra-short products. People have been looking for a low-risk asset class.

DM: That’s an interesting point about the inflows that you had to emerging market and particularly Chinese equities. We saw that in the performance of Chinese equities in the first quarter following the DeepSeek announcement #1 and then #2 the meeting you have between Xi Jinping and the leaders for the tech sector in China showing that the government was supporting that part of the economy. I’m curious how flows have been in April given what’s happening on the tariff side.

DD: So, for global emerging market exposures, it’s still slightly positive. We’ve just over 100 million in flows since the beginning of the month. When it comes to China equities, it’s negative since the beginning of the month: we’ve just over 350 million in outflows.

DM: Let’s pick up on another topic. If we think about changes in how investors are allocating their funds, what do you see in terms of flows to ESG ETFs?

DD: ESG flows are down 9% in Q1 2025. It’s low compared to 2024 and previous years. It’s mainly led by a decrease in ESG in the equity space. The idea is that the lower tracking error introduced by ESG on fixed income can be an explanation. If we look into the details of this dynamic in the equity space, we have seen strong outflows on a very selective ESG product, while the flows on less selective ones with a lower tracking error have seen strong inflows. That’s a trend that started last year, but that has amplified since the beginning of the year. So, there are still areas where ESG really gathers interest.

DM: What’s happening with active ETFs?

DD: Active ETF has been really of interest for investors and 2024 was a record year with around 20 billion in inflows. Q1 2025 has been the strongest start of the year, even better than 2024. We have seen over 6 billion in inflows dominated by equities, once again led by Europe and global exposures. On the fixed income side, it’s also on ultra-short exposures. March was the record month for flows into active ETFs – the strongest month ever.

DM: If we could summarise some of the key points you shared with us. We’ve seen initially strong inflows into US ETFs. Now that’s turned to outflows and instead we’ve seen inflows into European ETFs, emerging markets, in China, That’s waned in April with all the news on the tariff front. By contrast, continued interest in thematic ETFs, particularly for defence sector ETFs. Within the ESG space, you highlighted that particularly lower tracking products are continuing to see interest in fixed income. And then you noted that March was a record month for inflows into active ETFs. Well, Daniel, thank you very much for joining me.

DD: Thank you very much, Daniel. It was a pleasure.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities and ETFs, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com. Viewpoint brings you commentary and analysis in a variety of formats, from investment outlooks to asset allocation videos and podcasts to help investors make better informed decisions. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Daniel Dornel, Head of ETF Research. Please do join me next week. Until then, take care.