Adapting to market sentiment: how investor behaviour influences ETF flows

Investor sentiment drives markets, shaping investment trends, risk tolerance and, ultimately, portfolio decisions. Exchange-traded funds (ETFs), with their transparency, liquidity and versatility, have become powerful indicators of how investor attitudes are shifting in real-time. In 2025, ETF flows in Canada and the US have emerged as critical insights into how investors navigate economic uncertainty, geopolitical tensions and evolving market dynamics.

Canadian ETF market: navigating economic challenges

Year-to-date (YTD) inflows into Canadian ETFs have reached record levels,¹ reflecting strategic investor shifts amid challenging economic conditions. Canadian ETFs attracted $39 billion in the first four months of the year, with flows balanced across equities and fixed income. Outflows were seen in pockets of the market including technology focused ETFs.

Additionally, geopolitical factors, such as the recent US tariffs targeting key Canadian exports, have notably influenced equity flows. These tariffs have raised concerns around economic growth and trade stability, prompting Canadian investors to reduce their domestic market exposure. In response, we see heightened interest in international equities as investors diversify risk and seek opportunities outside of North America.

Mackenzie Investments has observed robust interest in ETFs providing international exposure, such as the Mackenzie International Equity ETF (MIQE). This ETF has drawn attention as advisors rebalance portfolios to mitigate concentrated domestic risks and to capitalize on diversified global growth opportunities.

US ETF market: selective and strategic

The US ETF market continues to display remarkable resilience, with significant YTD inflows despite a backdrop of sustained volatility. Equity ETFs in the US recorded substantial inflows, particularly in large-cap and defensive sectors, underscoring persistent investor confidence in established, stable growth companies.

At the same time, fixed-income ETFs have experienced record-breaking inflows, reflecting a cautious market sentiment driven by lingering uncertainty around the Federal Reserve’s policy direction and bond yield volatility. Notably, ultra-short duration Treasury ETFs saw significant flows as investors preferred the perceived liquidity and safety in an uncertain rate environment.

The rise of active and strategic ETFs

In both Canada and the US, there is a pronounced shift toward active and strategic beta ETFs. As markets become more complex, investors are increasingly seeking out actively managed solutions for tactical positioning and risk management. Active ETFs accounted for a substantial portion of inflows in Canada in 2024, with continued momentum into 2025. Mackenzie's actively managed offerings, like the Mackenzie Canadian Strategic Fixed Income ETF (MKB) and Mackenzie Global Equity ETF (MGQE), have attracted considerable attention, driven by investor confidence in skilled management and dynamic portfolio construction.

Strategic beta ETFs, offering systematic exposure with built-in risk management, have also gained popularity. Mackenzie’s suite of strategic beta ETFs has experienced strong inflows that reflect investor preferences for lower volatility and higher quality, such as the Mackenzie World Low Volatility ETF (MWLV).

Investor sentiment: insights from ETF flows

Analyzing ETF flows provides valuable insights into broader investor psychology and risk appetite:

• Defensive stance: increased inflows into low-volatility, dividend-paying ETFs indicate investors’ preference for defensive equity positioning, aiming to reduce portfolio volatility amid uncertainty.
• Income focus: persistent flows into fixed-income and dividend-focused ETFs reflect investors' ongoing search for yield as interest rates remain elevated and uncertain.
• Global diversification: increased allocation to international and emerging market ETFs demonstrates investors’ strategic response to localized economic risks, notably US-imposed tariffs affecting Canadian markets.
• Active management appeal: continued strong inflows into active ETFs underscore investor willingness to pay for management expertise to navigate complex and rapidly evolving market conditions.

ETFs also play an important role in price discovery, particularly during periods of market stress. Because they trade intraday, ETFs can reflect real-time shifts in investor sentiment and help reveal where markets are headed before traditional mutual fund net asset values catch up. This suggests that ETFs are not just a tool for execution, but a leading indicator of market direction and a critical source of transparency in times of heightened volatility.

Leveraging ETF flows for strategic insights

ETF flows in 2025 are more than data points — they are a clear, actionable reflection of investor sentiment. As market conditions fluctuate, understanding ETF flow dynamics can equip advisors and investors with critical insights for informed decision making.

At Mackenzie, we remain dedicated to delivering innovative ETF solutions designed to help investors strategically navigate changing market sentiment and evolving macroeconomic realities. Our comprehensive suite, encompassing active, passive and strategic beta ETFs, empowers investors to effectively adapt portfolios in real-time, meeting their unique risk, yield and diversification objectives.

Explore our ETF offerings and discover how Mackenzie Investments can support your strategic investment decisions in today's complex markets.

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1 Source: Bloomberg, Mackenzie as of May 30, 2025.

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