With trade wars wreaking havoc on the markets, investors and advisors are scrambling to pinpoint areas to place their geographic bets across the globe. Despite the temporary breather on “reciprocal” tariff policies, many expect more uncertainty ahead and are shying away from tariff-exposed regions. This includes China-focused funds. They are instead pivoting to other areas benefiting from a boost to defense spending and supply chain relocation. Of course, the baseline blanket 10% tariffs that have already kicked in remain for now. So do levies on steel, aluminum, autos, and other goods targeted by the Section 232 tariffs. To top it off, Goldman Sachs says even excluding “reciprocal” tariffs, the tariffs announced to date and additional sectoral tariffs are expected to be worth nearly 2% of U.S. GDP.
Investors have shown renewed favoritism toward manufacturing and industrial plays, like the Industrial Select SPDR Fund XLI) This includes “friend-shored” trade alliances, such as U.S./Mexico/Canada, via funds like the iShares MSCI Canada ETF (EWC ). This ETF has staged a positive reversal in net flows after last year. All this comes as tariffs incentivize onshoring.
There’s been a notable shift toward ETFs with companies less reliant on single-region inputs (e.g., the TCW Transform Supply Chain ETF (SUPP ) ), as well as so-called “tariff-proof” sectors, like defense, utilities and infrastructure (e.g., the Global X U.S. Infrastructure Development ETF (PAVE ) ) that are viewed as less vulnerable to trade wars.
So far, single-country ETFs have gathered the most flows in the U.S. and across Europe. Germany has netted north of $1 billion in year-to-date inflows. That has largely been fueled by relative outperformance, optimism over defense stocks, and relatively high dividends. Japan has seen net positive inflows this year. But the country’s inflows had a mixed showing last month due to rising tariff anxiety. The Franklin FTSE Japan ETF (FLJP ) has seen solid inflows for the year. The $2 billion fund takes a broad approach, with more than 500 holdings.
The 'New Normal'
Dina Ting, head of global index portfolio management at Franklin Templeton ETFs, says the story is no longer about inflation or rate cuts. It’s about positioning for a more fractured global economy that she’s calling the new normal.
“With the EU aiming to boost military spending to 3%-3.5% of GDP, we have seen Germany break its piggybank, so to speak, to lead this charge,” she said. “This directly benefits arms manufacturers, like Germany’s Rheinmetall – which manufactures combat equipment and armored vehicles and has been a recent standout performer among European aerospace and defense firms.”
Alliances Being Reshaped Worldwide
In fact, that stock has soared 171% from the end of September to the end of March. Ting said she saw potential growth opportunities being created, as the spending should benefit not only defense hardware but also cybersecurity, intelligence, and civil protections. “What’s more, the significant boost in spending is reshaping alliances worldwide and spurring investment opportunities in select markets,” she added.
For instance, some of South Korea’s largest defense contractors recently announced new international partnerships. Those partnerships include several landmark aerospace contracts with Southeast Asian nations. Those include India and Vietnam, as well as parts of Eastern Europe. Very few ETFs offer single-country exposure to South Korea. But the $100 million Franklin FTSE South Korea ETF (FLKR ) is one such option that tracks large- and midcap companies, the largest of which is Samsung.
Five days after President Trump fired his latest salvo of “Liberation Day” tariffs, India’s stock market fell about 6%. Yet the Bombay Sensex outperformed the MSCI Emerging Market Index by roughly 400 basis points and still outdid the S&P 500 Index. The $1.7 billion Franklin FTSE India ETF (FLIN ), which has seen net inflows of $140 million YTD, is the cheapest product of its kind at a net expense ratio of 0.09%.
“The wisdom of global diversification rings especially true as we witness the unfolding of new U.S. trade policy that appears to be dictated by Trump’s sense of ‘fairness’ and his penchant for wheeling and dealing,” Ting concluded.
The bottom line is that tariffs and fragmentation have made ETF selection more tactical. Investors must prioritize granular geographic and sector exposure, adapt to policy shifts, and balance defensive positioning with thematic bets on reindustrialization and supply chain resilience.
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