It’s that time of year… a look back at some of my favorite charts and pictures from the year in ETFs. Enjoy!
ETF Story of the Year
ETFs posted their second-best year of inflows ever, despite a tumultuous market environment.
Nearly $600 billion flowed into ETFs this year – trailing only 2021’s record haul of $900+ billion. The ETF industry also featured record trading and options volume, near record launches, and big name new entrants.
2022’s impressive inflows were despite the fact that 85% of equity ETFs and 80% of bond ETFs were down on the year.
Meanwhile, mutual funds experienced record outflows, with a massive $1.5+ trillion gap between ETF and mutual fund flows. 2022 may go down as the year mutual funds officially passed the baton to ETFs as the investment vehicle of choice.
Bond ETFs, which celebrated their 20-year anniversary in 2022, deserve a special mention. Investors plunked close to $200 billion into the products, despite the brutal year in the bond market. On the other hand, investors yanked nearly $500 billion out of bond mutual funds. Lower costs, tax efficiency, intraday tradability, and transparency are fueling the format change from mutual funds to ETFs… which is clearly accelerating.
Rise of Active ETFs
A key trend this year was big name, traditional active managers such as Capital Group, AllianceBernstein, DoubleLine, and Matthews Asia finally entering the ETF market. Actively managed ETFs continued punching above their weight, garnering nearly 14% of inflows despite comprising less than 4% of total ETF assets. Global assets in active ETFs hit an annual record $474 billion at the end of July – aided by a growing number of mutual fund to ETF conversions. While the ETF industry’s roots are passive, many of its recent blossoms are active.
Russia ETFs Halted & Closed
Russia’s invasion of Ukraine in February led to massive economic sanctions on the country, whose financial markets ceased to function properly. Initially, Russia ETFs kept trading through the turmoil, though a lack of creations caused large premiums to develop. Ultimately, US stock exchanges halted trading altogether in these products, which have essentially gone to zero and are now liquidating.
First Single Security ETFs
The first single security ETFs debuted in July with AXS Investments launching a suite of products offering leveraged and inverse exposure to stocks such as Tesla. Other issuers including Direxion and GraniteShares quickly jumped into the game as well. Some issuers even attempted to pursue using the ETF wrapper as an end-around to ADR listing requirements. All of this despite FINRA proposing new rules around “complex products” and the SEC publicly discouraging use of these ETFs.
It wasn’t just single stock ETFs that rolled out in 2022. The first single bond ETFs launched in August, with F/m Investments offering a lineup of single Treasury ETFs – a lineup that has already eclipsed $400 million in assets.
ETF of the Year
There were several excellent candidates for ETF of the year, but Pacer’s US Cash Cows 100 ETF (COWZ) takes the crown…
COWZ began the year with around $1.25 billion in assets. It closed 2022 with over $10 billion and didn’t lose investors any money, delivering a flat return. Bloomberg’s Eric Balchunas captured the story well…
The iMGP DBi Managed Futures ETF (DBMF) also deserves some ink. The fund began the year with about $60 million in assets and ended 2022 by eclipsing the $1 billion mark. DBMF posted a healthy 22% return while many other asset classes were deep in the red.
Equity Income ETFs
While COWZ, DBMF, and SARK (the AXS Short Innovation Daily ETF; up about 50% this year) were sexy picks, a case could easily be made for the Schwab US Dividend Equity ETF (SCHD) or JPMorgan Equity Premium Income ETF (JEPI) as ETF of the year. Both were in the top 10 of ETF inflows. There were numerous other candidates including the Amplify CWP Enhanced Dividend Income ETF (DIVO), which grew from less than $1 billion to $2.5 billion in assets. Overall, it was a record-setting year for dividend or income-focused stock ETFs.
Besides equity income ETFs, another standout category in 2022 was defined outcome (or buffer) ETFs. With equity markets down double digits, risk-mitigating investors placed over $10 billion into these products – which seek to offer some downside protection. There are now over 160 buffer ETFs.
The Lost ARK…
ARK Invest, 2020’s ETF story of the year, remained in the headlines in 2022 – though not for the reasons they would like. Their flagship ARK Innovation ETF (ARKK) closed the year down nearly 70%, as rising interest rates and compressing multiples wreaked havoc on “disruptive innovation” stocks. The firm also closed their first ETF, the ARK Transparency ETF (CTRU). Despite the rough year performance-wise, ARKK actually took-in over $1.2 billion in new investor money this year. However, the firm’s total assets have dropped from a peak of $60+ billion in February 2021 to less than $11 billion today.
Source: Financial Times’ Harriet Agnew
Vanguard Chasing ETF Crown
ARK ETFs typically occupy satellite positions in a portfolio, or “hot sauce” as Bloomberg’s Eric Balchunas calls them. The core of a portfolio is dominated by the likes of Vanguard and iShares. In 2022, Vanguard’s Total Bond Market ETF (BND) surpassed iShares’ Core US Aggregate Bond ETF (AGG) as the largest fixed income ETF. Vanguard also led all ETF issuers in inflows and now sits about $300 billion away from iShares’ ETF crown. Below is one of my favorite pictures/memes from 2022. This is in reference to Balchunas’ excellent book “The Bogle Effect“, which explains just how radical Jack Bogle was and why Vanguard is now in this enviable position.
Here’s a quick look at current ETF market share for Vanguard and iShares. This shows ETF issuer market share by assets, flows, products, revenue, and trading. For example, Vanguard comprises 29% of total ETF industry assets and 37% of net flows, but only accounts for 3% of products, 9% of revenue, and 7% of trading volume (remarkable numbers by the way!)…
ESG ETF Flows Slow to a Trickle…
Investors grew a bit gun-shy this year at putting new money to work in ESG ETFs. After two straight years of over $30 billion in inflows, ESG ETF flows slowed to a trickle in 2022. There are several potential reasons including underperformance, shrinking model portfolio usage, and the growing politicization of ESG. I, for one, am not surprised…
Meanwhile… Traditional Energy ETFs Shine
There was a 100%+ return difference between the top-performing and bottom-performing sectors of the S&P 500. The energy sector led the way in 2022, with the Energy Select Sector SPDR (XLE) posting a 60%+ return. The top of the ETF performance leaderboard was dominated by energy-related ETFs.
Still. No. Spot. Bitcoin. ETF.
The SEC continued denying all comers on a spot bitcoin ETF. Grayscale finally had enough and sued the SEC over converting the Grayscale Bitcoin Trust (GBTC) into an ETF. GBTC is currently trading at a nearly 50% discount, a problem an ETF would quickly solve. Nevertheless, the SEC is simply not having it.
It should be noted that the first futures-based bitcoin ETF – the ProShares Bitcoin Strategy ETF (BITO) – tracked the price of spot bitcoin near flawlessly, though it has to be one of the most ill-timed ETF launches ever. BITO has plummeted more than 75% since its October 2021 debut. The oversaturated “blockchain” ETF space didn’t fare much better (and in some cases, it fared worse). Oh, and FTX customers may have lost all of “their” bitcoin due to fraud (another problem an ETF would solve). However, we did get the first inverse bitcoin futures ETF – the ProShares Short Bitcoin Strategy ETF (BITI). But… Still. No. Spot. Bitcoin. ETF.
ETF Innovation is Alive & Well…
While there is still no spot bitcoin ETF, there were plenty of noteworthy ETF launches and filings in 2022. From NightShares to BondBloxx and Jim Cramer ETFs to a Nancy Pelosi ETF, ETF innovation is alive and well. And before you say “there are too many ETFs”, just remember…
ETF Future is Bright
Speaking of mutual funds, many industry observers agree that it’s only a matter of time before ETFs surpass mutual funds in total assets. It’s a matter of “when”, not “if”. But when is the “when”? VettaFi’s Dave Nadig estimates that monumental day could come around 2028, aided by bear market pullbacks and greater ETF adoption in 401ks.
Happy New Year, everyone! See you in 2023!