High inflation, rising interest rates and fears of a recession weighed heavily on currency trading performance in 2022 – a trend experts believe will continue into 2023.
“We can see the difference between looking for income and looking for security,” said Danielle LeClair, Toronto-based research manager for Morningstar Canada.
Here are five trends that ETF experts predict will shape the ETF landscape in the new year.
1. Hanging on to high-interest savings.
High-interest savings funds saw the highest inflows among ETFs in Canada in 2022, with more than $7-billion flowing into cash-alternative ETFs as of Nov. 30, ahead of National Bank Financial’s CI High-Interest Savings ETF (CSAV-T) at $2.4-billion. It had size, the data shows, followed by the Purpose High Interest Savings ETF (PSA-T) at more than $1.6-billion.
“Investors weren’t sure where to go, so many went into debt with these financial instruments,” says Ms. Leclair.
She says these ETFs, which offer low but steady yields, are expected to remain popular through 2023, given that interest rates remain high and market volatility remains.
2. Fixed income will come back
Demand for high-interest savings has pushed inflows into fixed-income ETFs, which include bonds and cash options, to a record high of $13-billion in 2022 through Nov. 30, said Tiffany Zhang, a National ETF analyst. Bank Finance.
As the year progressed, however, the traditional broad-based aggregate bond ETF attracted more attention, accounting for more than $6-billion in inflows. Bond fund prices fell in early 2022 as interest rates rose quickly, but investors were looking for a broader range of bond ETFs in late fall, as yields rose sharply with a broader outlook. Growing demand in the latter half of the year helped boost fixed income to the second-best year in Canadian ETF history, Ms. Zhang said, when she sees $14-billion in inflows after 2019.
Among the funds that put investors’ capital aside is the Vanguard Canadian Aggregate Bond Index ETF (VAB-T). It earned $420-million in November, according to National Bank data.
Investors are likely to allocate more to bond ETFs in 2023, more than double from early 2022, and interest rate hikes are expected, Ms Zhang says.
3. Different options for income ETFs
As investors “continue to find what works,” equity ETFs that offer income from dividends and options strategies, such as writing covered calls, may see more interest, according to Lara Krieger, managing editor of the New Orleans-based ETF Information Firm. VettaFi
She points to US-listed funds such as JPMorgan’s Equity Premium Income ETF (JEPI-A), which yields 10 per cent a year and sees inflows of nearly US$12-billion by 2022.
Income equity ETFs, which include yield-generating options, have been popular in Canada, with revenues expected to peak at $4-billion by 2022, Ms. Zhang said.
ETFs such as BMO’s Canadian High Dividend Covered Call ETF (ZWC-T), which is about 6 percent, could see demand in 2023 as “investors look for yield from less traditional strategies,” Ms. LeClair added.
4. Commodities continue to be attractive.
Commodity-based ETFs, including energy, base and precious metals, and agricultural commodities, are likely to see a renewed focus on overall strong performance in 2022.
National Bank data for performance shows ETFs leading energy ETFs across all sectors in Canada. Horizons Natural Gas ETF (HUN-T), up nearly 72 percent, tops the list, followed by CI’s Energy Giants Covered Call ETF (NXF-BT), up 52 percent since Dec. 12. Both are total returns.
Mrs. Krieger added that especially in 2022, during the Russian invasion of Ukraine, agricultural products have attracted more attention, they are the main producers of products such as wheat, corn and fertilizers.
“Everybody seems to be an armchair grain commodity analyst,” she says, as you watch stocks like Invesco DB Agriculture (DBA-A) pour in hundreds of millions of dollars in the spring.
Interest in most products has declined for the year, with most ETFs experiencing net outflows in recent months, she added.
Commodity ETFs could see a return to focus in 2023 when the war in Ukraine affects supply. Still, some commodities may come under pressure from the economic slowdown many are predicting, Ms. Krieger says.
“I don’t think you can crystalize what’s going to happen because a lot of it depends on things like the weather,” she says.
Still, if volatility continues, investors may find windows of opportunity for commodity ETFs, Ms. Krieger noted.
5. More actively managed growth strategies
More actively managed ETFs are expected to hit the market in 2023, adding to the growing trend in 2022 and previous years. More asset management firms are turning to ETFs as demand for mutual funds declines, Ms. Krieger noted.
In the year 2022 was a tough year for mutual funds in Canada, with net outflows of $30-billion as of Nov. 30. According to National Bank data, ETF revenue could top $30-billion a year — making it the third. After 2021 ($52-billion) and 2020 ($40-billion), the best year on record), Ms. Zhang said.
In the past year, Canada’s list of a few and popular actively managed, growth-oriented ETFs, including BMO’s ARK series, launched in November, has offered picks like the BMO ARK Next Generation Internet Fund ETF ( ARKW-T ). ETFs manage US-listed funds from ARK Investment Management LLC., led by renowned active manager Cathy Wood.
Demand for the ARK ETF increased in 2020 as investors chose growth themes such as fintech and robotics, but in 2022, these funds underperformed as many investors sought safety at an affordable price.
Additionally, Canadian investors may see a very different spin on growth ETFs, passive or active: single-stock ETFs.
Purpose Investments filed a forecast in November for 10 funds, each holding one stock like Tesla ( TSLA-Q ), Ms. Zhang said, noting that ETFs use options to leverage active leverage and boost returns.
Although these growth-oriented startups may seem obsolete, “there are still big investors for them,” notes Ms. LeClair.
Of course, as with other 2023 trends, investors chasing past returns could lead to future losses, she warned.
“This is always a risk, especially for new startups.”