Exchange-traded funds (ETFs) are pooled securities, composed of stocks or other assets, that typically have relatively low fees. ETF shares can be traded on stock exchanges, and their prices change throughout the day, unlike mutual funds whose prices are only updated once a day.
Keeping an eye on ETF trends can help investors make better decisions, particularly in markets such as the current one, in which economists widely expect inflation to rise and volatility to continue.
Top 10 ETF Trends for 2022
Interest in ETFs continues to build. Last year, ETFs had a record year, attracting more than $1 trillion in net new inflows, according to Franklin Templeton .
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Here’s a look at several trends impacting ETF investments to consider, if you’re looking at ETFs for your retirement portfolio or brokerage account.
1. Actively Managed Funds Will Grow in Number
Most ETFs are passively managed, meaning fund managers simply construct their portfolios to match an index. They do not actively buy and sell securities on a frequent basis.
Active ETFs, by contrast, work like an active mutual fund in that the portfolio manager attempts to capitalize on investment opportunities by buying low, selling high, and repeating the process. They aim to outperform their benchmark, although their performance does not alway meet those goals.
Still, active ETFs have been growing in popularity despite accounting for less than 5% of the nearly $7 trillion ETF universe. The potential for higher returns appeals to investors, even if there’s a risk of underperformance. High-profile active ETFs include some that invest in innovative technology growth stocks.
2. Investors Could Return to Bond ETFs
After many years of strong stock market returns, many investors have rebalanced to their target asset allocation. That often means buying bond ETFs and trimming positions in stock ETFs. Inflows to fixed-income funds continued in 2021 despite poor bond returns. Investors should understand the relationship between bond prices and yields – when interest rates increase, bond prices drop.
Bond ETFs come in many flavors, including corporate bond funds, Treasury ETFs, and domestic fixed-income ETFs, and many investors consider bonds a safer investment than stocks, which tend to carry more risk along with the potential for greater rewards.
3. Cryptocurrency ETFs Could Continue to Evolve
Some cryptocurrency investors have seen substantial gains in recent years, although it’s been a volatile ride. A new crop of crypto ETFs allows more investors to get in on the $3 trillion asset class, without having to invest directly in crypto via exchanges. That said, cryptocurrencies are still just a fraction of global investable assets though some financial services companies are looking at ways to make crypto more accessible for mainstream investors.
4. Potential Rebound in Emerging Markets
Emerging market economies, including China, Brazil, Russia, and India, tend to carry high risks with the potential for outstanding rewards. That’s because investors see these economies as having the potential for stronger returns thanks, in part, to a rapidly growing middle class. Emerging markets got off to a relatively strong start in 2022, further outperformance could draw more investment flows to EM ETFs.
5. Tech’s Influence Could Continue
The technology sector represents nearly 30% of the S&P 500. It is a significant piece of the U.S. stock market, but a smaller portion of overseas markets. Tech is not simply a risk-on area – 2020 taught us that this sector can outperform even during volatile periods. Some of the biggest technology companies have ample cash on their balance sheets that can help weather storminess in capital markets, making them appealing to ETF investors.
6. Gold ETFs May Make a Comeback
Gold and other precious metals enjoyed strong investor interest in the aughts. Strong annual performance through 2011 drew in many investors seeking safety amid volatile equity markets. In the 2010s, however, the yellow metal struggled, which some attribute to the rise of crypto during that time. Following a reset in expectations, ETF investors may take a shine to gold once again.
7. Renewable Energy ETFs Could Return to Favor
Solar stocks, wind energy companies, and even battery storage technology lured many investors in 2020, and renewable energy ETFs surged. Last year, however, their outperformance faded, as the market shifted back to traditional oil and gas stocks through early 2022.
Active investors will monitor ETF trends for the right time to re-enter green and ESG ETFs. The Environmental, Social, and Governance (ESG) movement remains top of mind among both global investors and major international companies who want to make an impact with their portfolios.
8. Dividend ETFs Could Provide Some Safety
With the U.S. Federal Reserve planning to raise interest rates in 2022, investors nervous about owning bond ETFs might seek an alternative means of finding yield. High dividend stocks could meet this need. There are many dividend-focused ETFs from which investors can choose.
These ETFs invest in companies with historically stable dividend policies and some even own stocks with fast-growing dividends. They’re not a sure bet, however. Dividend ETFs still typically underperform when investors seek high-growth and technology stocks.
9. Volatility and Inverse ETFs Could Return to Favor
Amid the stock market volatility that kicked off 2022, traders might play volatility-linked exchange-traded products and even inverse ETFs. These funds offer the potential to profit from stock market downturns. When equity sell offs occur, volatility often shoots up.
Short-term traders can position their portfolios into volatility funds to profit from that market condition. Beware, however, as some of these products are “notes” backed by the credit of the issuer, so there is default risk.
Inverse ETFs are designed to have a negative beta to an equity index. Some are even leveraged, meaning a fund might move two times the amount of the underlying index, but in the opposite direction. These are very risky products, so it’s particularly important to perform due diligence and have a trading plan.
10. Costs Keep Coming Down for Index ETFs
Beyond investment sectors, an important ETF trend is lower costs as the ongoing fee war among index ETF providers continues. This is good news for long-term investors since the cost to own index ETFs is on the decline.
The Future of ETFs
ETFs continue to gain popularity and investment dollars. Their ease of use, cost-effectiveness, and vast investment offering are positive features. ETFs may even likely to surpass mutual funds in total assets in the coming years.
An ongoing fee-war among ETF issuers, who continue to lower their expense ratios, is beneficial for long-term index investors while active traders have more trading vehicles than ever to fit many strategies.
ETFs remain a popular asset among many investors because they provide a low-cost way to get access to a diversified basket of investments through both retirement accounts such as an IRA and taxable accounts. Given the wide range of ETFs available, and the volatility and uncertainty in today’s markets, the sector continues to evolve and change.
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