ETF Investors Think They Found A Way To Make More Money Next Year

There’s one upside to this year’s terrible performance for most ETFs. It’ll be easier to do better next year.


Talk about a rough year. The benchmark S&P 500 that most ETFs are measured against clobbered investors with an 17.3% net loss as of Dec. 21. All but eight of the 240 actively traded US diversified ETFs dropped during 2022. And energy was the only sector of the 11 in the S&P 500 to show a gain. Adding to the pain, even bond ETFs, normally a place to hide, sank. Thus, the “safe” 60/40 portfolio, made up of 60% stocks and 40% bonds, wasn’t so safe after all.

“Double bear markets in global bonds and stocks unleashed unprecedented pain on portfolios in 2022, sending the standard 60/40 allocation to depths not witnessed since the Global Financial Crisis,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors. “What’s worse, however, is that the most conservative retirement-like allocation registered its worst return ever, -17%.”

Few Places To Hide With ETFs

Carnage in the ETF world was relentless in 2022.

Starting with US diversified stocks, the basic building block of many portfolios, shows just how painful the year was. Nearly $16 trillion in investments is riding on the S&P 500. And being more bullish on growth backfired even more. The ARK Innovation ETF (ARKK), chock full of companies selling forward-looking products like Tesla (TSLA) and Zoom Video Communications (ZM), dropped a crushing 65% this year, making it one of the worst ETFs of the year.

Speculation and moonshots were out in 2022. That spanned every formerly hot investment theme, from cloud computing to cryptocurrency to cannabis and online shopping. The bruising 64% plunge in the largest Bitcoin ETF, ProShares Bitcoin Strategy ETF (BITO), made that very clear. The fear of missing out turned into the fear of losing tons of money. AdvisorShares Pure Cannabis ETF, which trades by the symbol (YOLO), crashed nearly 74%.

“A year ago, interest in crypto ETF investments was strong, with the first Bitcoin futures ETF launching and more firms offering crypto-related equity strategies,” said Todd Rosenbluth, head of research at VettaFi. “These are some of the worst performing ETFs in the past year and the asset base for the products has shrunk significantly.”

Not Just Speculative ETFs Get Trashed

But it wasn’t just speculative plays getting trashed, adding to the peril for portfolios. Even the Fidelity Blue Chip Growth ETF (FBCG) pounded investors with a 38% loss. It was loaded up with megacap giants that looked infallible in 2021 like Apple (AAPL), Microsoft (MSFT) and (AMZN). But shares of these giants plunged in 2022, handing investors giant losses.

Bonds’ rough year delivered perhaps the biggest shock. The Vanguard Extended Duration Treasury ETF (EDV), a refuge of nervous investors, lost 36% on the year. Bond ETFs suffered from the Federal Reserve’s aggressive plan to slow the economy by raising short-term interest rates, Rosenbluth says.

“When both stocks and bonds become as tightly correlated as they have become this year — the correlation of rolling 12-month returns between stocks and bonds was 95% in 2022, compared to a 6% correlation historically — and the return trend is negative, it’s hard to find a positive return-producing asset,” Bartolini said.

What Worked In 2022?

That’s not to say all ETFs flamed out. There were places to make money, they were just relatively rare and not obvious. As far as diversified US ETFs go, dividend-focused funds were in.

ETFs focusing on high-dividend paying companies were among the only types of funds to rise this year. And even those gains didn’t set any records. The WisdomTree US High Dividend ETF (DHS) is the standout with a 7.2% return this year. But that’s a little more than half of the typical annual return of the S&P 500.

Looking outside the US, too, paid off for some. Thanks to strong pricing and demand for materials used by industry, the iShares MSCI Turkey ETF (TUR), iShares MSCI Chile ETF (ECH) and iShares MSCI Brazil ETF (EWZ), returned 104%, 22% and 13%, respectively.

Energy, too, fueled by rising oil and gas prices provided opportunities for ETF investors as well. All the top sector ETFs hailed from the energy patch. Some of the gains, too, were massive especially against the backdrop of a plunging S&P 500. The VanEck Oil Services ETF (OIH) returned 64%.

What Will ETF Investors Do Now?

Beating ETF performance in 2023 shouldn’t be tough given how bad 2022 was. The question, though, is how to do it.

The biggest X-factor in how stock and bond ETFs will do in 2023 hinges on the Federal Reserve. The Fed’s aggressive hikes in short-term interest rates this year, the fastest in decades, will continue as long as inflation remains high, Rosenbluth says.

“While it is not clear when, the Federal Reserve will shift away from aggressive rate hikes in 2023 and give the economy a chance to reflect the higher rates,” he said. “This could spur interest in technology investments as well as thematic (funds) tied to clean energy that have long-term catalysts.”

Bartolini thinks investors won’t just shrug off 2022 and go back to speculating on tech stocks again. High inflation, skyrocketing interest rates and inflation plus global conflict will hold ETF investors back in 2023, he says. Much hinges on how soon the Fed’s rate hikes finally sink their teeth into the economy and slow it down.

That’s why he thinks ETF investors will stick with dividend, value stock, energy, health care and short-maturity bond ETFs for the immediate future.

“At some point, the coordinated central bank tightening will ease off their aggressiveness, as the 2022 extreme hikes find their way into the economy,” he said. “And when this happens, markets may begin to heal and find a firmer footing.”

Follow Matt Krantz on Twitter @mattkrantz

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