In Mackenzie Investments’ year-end ETF report, our experts, Michael Cooke (Head of ETFs) and Prerna Mathews (VP of Product and Strategy) weighed in on ETFs’ performance in 2022 and what we can expect to see this coming year.
Here are their top five ETF trends for 2023:
Growth of investment in ETFs set to continue
One of the persistent ETF trends in recent years has been an increase in ETF assets under management (AUM). We all know how 2022 was a tough year for the markets; high inflation, spiking interest rates and geopolitical uncertainty combined to bring markets tumbling down. The S&P 500 Index dropped by almost 20%, while the S&P/TSX Composite Index fell by 8.6%.
While mutual fund investments decreased in Canada last year, exchange-traded funds (ETFs) had yet another bumper year, with inflows of $35 billion. This took the total AUM in Canadian ETFs to $314 billion (the second time ever that ETFs topped the $300-billion mark).
ETFs usually do well in periods of upheaval, and investors seem to be increasingly grasping the benefits of investing in ETFs, such as:
- An increasing range of choices
Being extremely easy to buy and sell, ETFs give investors more choices when times are tough, beyond just turning their investments into cash. ETFs make it easy to tweak asset allocations, improve diversification and reduce concentration risk from being too heavily weighted in one area, all achievable at any point during the trading day.
In tough years for the markets, like 2022, investors need to be more mindful of what they hold in their portfolios and find ways to improve the asset mix. ETFs can offer very efficient asset allocation, particularly when markets are in turmoil. With an increasing number of investors allocating to this space, the upward trajectory of demand for ETFs is likely to continue into 2023.
Neglected sectors making a comeback
One of the expected ETF trends for 2023 is a move away from “the next big thing” towards more reliable, established options. Cryptocurrency ETFs were extremely popular, with billions flowing into Bitcoin and Ethereum funds. Recently though, after cryptocurrency values plummeted from their peak levels of 2021, many crypto ETFs have seen a reversal of flows.
Previously unfashionable sectors are making a comeback, for example, infrastructure. This is a sector that has provided consistent returns and yield, often with contracts that are linked to inflation. Infrastructure can bring more consistent returns than some other sectors, particularly during volatile markets.
Bonds to continue their boom
Despite negative returns in most fixed income markets, bond yields climbed in 2022 and fixed income ETFs became more popular, taking in more than $19 billion in inflows that year – the most in the history of the Canadian ETF industry.
There was increased interest in inflation-protection ETFs, such as real return bonds and TIPS (Treasury inflation-protected securities), as well as cash alternative products, such as HISA (high interest savings account) ETFs.
Inflation will probably remain elevated in 2023, and a recession is looking possible, both of which could mean that markets remain volatile throughout the year. Now that fixed income yields and coupons have risen significantly, the appetite for fixed-income ETFs is likely to keep growing.
Solutions-oriented ETFs will come to the fore
In the longer term, an ETF trend to watch out for is the growth of solutions-oriented ETFs. While a number of companies now offer all-in-one ETFs, which give investors access to a wide array of investments with just one product, there’s an opportunity to create more specific solutions-oriented ETFs, or objective-oriented ETFs as they’re also called.
Examples of these include drawdown ETFs (which are designed to allow retirees to withdraw money from their portfolios to provide retirement income) and buffer ETFs (which focus on protecting portfolios from market downturns, while taking advantage of growth opportunities).
Greater interest in thematic ETFs
Once investors start taking on more risk, thematic ETFs could see a rise in demand, especially those focused on exponential technologies (technology that doubles its capability or performance over a set period of time). Examples of investment themes that could attract investor interest include digital infrastructure, green technology and energy transition.
ETFs now offer a huge selection of product choices, making it likely that investors can find a thematic ETF that corresponds to their interests.
Are ETFs right for your portfolio?
Advisors, find out more about the types of ETFs that could fit into your clients’ portfolios by speaking with your Mackenzie sales team. Investors, talk to your financial advisor about ETF options that could complement your portfolio.
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