2022 ETF Market Update: Strong Year for ETF Growth?

Despite a bear market in 2022, ETFs had a strong year and accelerated in growth over their mutual fund counterparts.
 

The S&P 500 ended 2022 with a return of -18.11%, its worst return since 2008. Small and midcap stocks, as measured by the S&P 400 and S&P 600 did only slightly better, registering returns of -13.06% and -16.10%, respectively.[1] Last year’s market turmoil isn’t keeping the flow of capital into ETFs from rising to historically high levels, even if inflows have declined from 2021.

ETFs continued to be the vehicle of choice among investors in 2022 reaching the highest ETF trading volumes on record. By Q3, ETFs exceeded 2021’s trading activity with over $53.8 trillion traded in ETFs (compared with $41 trillion in 2021).[2]
 

The Fed Aggressively Raises Interest Rates

Probably the most significant news for the financial markets during 2022 was the Federal Reserve’s aggressive raising of interest rates to battle inflation. Starting the year near 0%, the Fed raised rates five times and ended 2022 at a range of 4.25%-4.50%. Many ETFs saw sharp drawdowns as equities and fixed-income strategies slumped beneath the Federal Reserve’s rate hikes.
 

ETFs Second Best Year of Flows

Several asset classes achieved their highest-ever flows despite the market turbulence.

• Government bond ETFs saw net inflows of $181 billion[3], which surpassed the three previous years combined. In particular, U.S. Treasuries accounted for 68% of fixed income flows in 2022, more than triple from the previous year.

• Value stocks significantly outperformed growth stocks with a performance gap between the S&P 500 Value and Growth indices of over 24 percentage points.[4]

• Some defensive sectors set records during 2022, such as Healthcare with flows of $20 billion and $6 billion from Energy/Utilities.[5]
   
• Defensive factors or strategies, such as low volatility and dividend yield performed well while riskier factors, such as growth and high beta performed poorly.

• Emerging market equities set a fresh record, sucking in $110 billion in 2022, according to Bloomberg data.

For those who anticipate continued market volatility, a more defensive strategy may be warranted. ETC offers funds that aim to provide risk management during turbulent market conditions.

Many asset managers that are sitting on losses or realizing capital gains taxes, may be deliberating a move to exchange-traded funds. Contact ETC to guide you through the ETF process.

[1] All data sourced from: Index Dashboard, S&P Dow Jones Indices, 12/30/22; Index Dashboard S&P 500 Factor Indices, S&P Dow Jones Indices, 12/2022
[2] As of 12/31/22. Source: Bloomberg
[3] As of 12/31/22. Source: Bloomberg
[4] All data sourced from: Index Dashboard, S&P Dow Jones Indices, 12/30/22; Index Dashboard S&P 500 Factor Indices, S&P Dow Jones Indices, 12/22
[5] As of 12/31/22. Source: Bloomberg

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