ETFs break new records, despite declines on global stock exchanges

Many people related to capital markets could breathe a sigh of relief when we said goodbye to 2022. There was a bear market, the ongoing global struggle of central banks with inflation, resulting in significant increases in interest rates, as well as Russia's invasion of Ukraine. It turned out, however, that despite unfavorable conditions, ETF market continued its development, breaking new records. Even the negative macroeconomic environment did not stop the emergence of a few "pearls" that boast great results.

The ETF market is expanding

In 2021, the value of funds accumulated in ETFs in Europe exceeded the level for the first time €1 trillion (year-end €1.33 trillion). For many years, this growth has been driven by increased capital inflows, which in 2021 reached a record level 161 mld euro. The data shows that investors did not turn their backs on ETFs even in a difficult 2022. Despite the unfavorable economic situation on global capital markets, the value of assets at the end of December 2022 was at €1.24 trillion.

The expansion of ETFs in Europe can be seen both in the number of instruments offered and the value of assets under management. The space for further development of the ETF segment is huge. It is enough to mention that in Europe the value of managed assets in relation to the capitalization of the stock market is only 6.80%, and in relation to the debt market the share of ETFs is only 1.50% (the corresponding values ​​for the USA are 12.00% and 2.30%, respectively).   

This trend is also confirmed by the latest one report BlackRock. Global ETFs and other ETPs took notice $867 billion net inflow in 2022. – this is the second result after the record year of 2021. This result was driven by both a strong inflow of assets to equity ETFs (USD 598 billion, the second highest result in history) and an inflow of assets to bond ETFs (USD 266 billion, the third highest highest score ever).

Most popular ETFs

Despite the declines in world stock exchanges, data from the ecosystem WealthSeed show that the biggest turnover is invariably on broad, global equity ETFs. The first in 2022 in this respect was the iShares Core MSCI World UCITS ETF. Currently, as much as 72% of the funds of European investors invested in ETFs are accumulated in solutions reflecting the quotations of stock exchange indices. Taking into account geographical directions, the American market has traditionally enjoyed great success, in which close investors have been invested 300 mld euro. Since 2022 was a specific year and only some asset classes brought a positive result, among those ETFs that accumulated the largest assets, we will not find solutions with the highest rate of return in 2022. On the other hand, if we look at the number of transactions, exchange products for cryptocurrencies were also active, potentially mainly due to high volatility, allowing for above-average rates of return in the short term. For example, the second most traded ETF/ETP product for the year in the WealthSeed ecosystem was CoinShares Physical Bitcoin. The characteristics of the cryptocurrency market mean that these instruments are most often bought for short periods with the use of much smaller capital.

ETFs with the greatest return

Among the 10 ETFs with the highest return in 2022 on the WealthSeed platform, which offers over 550 such products, as many as 70% are ETFs with exposure to shares from the energy industry or instruments focusing on direct investment in raw materials. Russia's invasion of Ukraine, as well as other market events, have made the topic of oil prices one of the dominant topics of heated debate. The very high volatility of prices and record-breaking refining margins meant that the biggest beneficiaries of the situation in 2022 turned out to be companies from the energy sector, and more precisely, companies involved in the extraction and processing of crude oil. The turmoil over the past years meant that companies in this sector had to adapt to various market circumstances. The activities carried out contributed to improving the efficiency and profitability of operations. Thanks to the discipline in capital expenditures, after years of underinvestment, the industry is expected to generate record free cash flows (FCF) this year.

The metamorphosis that has taken place in the recent period is best evidenced by the fact that in the previous 10 years the industry was characterized by negative cash flows as many as 9 times. A positive signal is also the scenario in which the sector may become debt free by 2024. The best reflection of the relative strength of the industry is the behavior of sector indices. In 2022, the S&P Energy index (65.7%) turned out to be the clear winner for the second time in a row, achieving a gigantic advantage over the next in the S&P Utilities ranking (1.6%).

Rates of return of selected ETFs with exposure to the energy sector and commodities available on the WealthSeed platform (as at December 31.12.2022, XNUMX). Source: Own study

Summation

In the area of ​​investment products, ETFs are one of the biggest winners of the last decade. As the experience of 2022 shows, even in difficult market circumstances, ETFs recorded investment inflows. The specificity of ETFs and their use primarily for long-term passive investments means that the largest assets and turnover are invariably accumulated by instruments reflecting the quotations of global and American stock indices (e.g. MSCI World, S & P 500). In turn, the wide variety of ETFs means that products with exposure to the asset class that performed best in a given period go to the top of the table with the highest returns in a given year. In 2022, instruments with a positive rate of return should be "looked for". One of the few segments recording price increases was the energy sector and commodities, and the most profitable ETFs were products giving exposure to these assets. Taking into account the prevailing trends, in 2023 we will observe the further development of ETFs with a high degree of probability.

Author: Piotr Langner – WealthSeed investment advisor