Good morning, VettaFi Voices! As we are in the final weeks of the year (and at the final VettaFi Voices roundtable for 2023), I figured we could discuss what the biggest stories in the ETF space were this year. What was the biggest story in ETFs in 2023 for you? What has the potential to have a lasting impact on the industry? Or is there something you think was a flash in the pan?
Todd Rosenbluth, VettaFi head of research: I have a few. Covered call ETFs are top of mind. The JPMorgan Equity Premium Income ETF (JEPI ) added $13 billion. Its more growth-oriented sibling, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ ) pulled in $6.1 billion. Other peer ETFs to see net inflows were Amplify CWP Enhanced Dividend Income ETF (DIVO ) and the NEOS S&P High Income ETF (SPYI ). We also saw new alternative income products from BlackRock, Goldman Sachs, and Morgan Stanley.
Active Had a Strong Year
Dave Nadig, VettaFi financial futurist: To me the biggest story of the year has to be active management. So many products launched, and active funds have roughly 20% of flows as we go into year end. Whether from conversions or just persistent flows like JEPI, it’s the story.
Nadig: However, the caveat there is that it’s definitely not performance chasing. Bellwether active fund, the ARK Innovation ETF (ARKK ), has had over $800 million in outflows so far this year, while putting up 54% returns.
Rosenbluth: We had BlackRock bring Rick Rieder to the ETF market with the BlackRock Flexible Income ETF (BINC ) and the BlackRock Total Return ETF (BRTR ), which launched this week. We had Franklin bring its flagship income strategy into ETFs. We had T. Rowe Price launch the T. Rowe Price Capital Appreciation Equity ETF (TCAF ) with a well known manager. The days when asset managers kept their best ideas for mutual fund investors only are gone.
Nadig: To me that’s the second story of the year — holy cats, the top of the food chain outperformed this year! The Invesco QQQ Trust (QQQ ) is up 50%! It’s literally been one of the greatest bull markets in history, and its honeslty barely made headlines.
Rosenbluth: ARKK’s performance success is also being matched by the Fidelity Blue Chip Growth ETF (FBCG ), which is a different type of growth ETF. Apple is a holding, not Square.
Active’s Rise Partly Driven by Issuers
Lara Crigger, VettaFi editor in chief: Just remember, a good chunk of those dollars going into active are active managers putting their money into their own funds and eating their own lunch.
Rosenbluth: Yes, Lara, this is not all organic money. But the strong flows have gotten asset managers off the sidelines and encouraged them to further commit to the ETF space. Fidelity — I keep using them as my example — converted a lot of active mutual fund assets to ETFs.
Nadig: By column inch, I am 100% sure more ink has been spilled on bonds, equity income, dividends, and defense. Yet …
Jane Edmondson, VettaFi head of thematic strategy: Single-stock ETFs with an option overlay to generate income were also a big story this year. The YieldMaxx ETFs come to mind in this category. And I think just alternative income in general.
Heather Bell, VettaFi managing editor: What I find interesting harks back to the lack of performance chasing, Dave mentioned. The VanEck Digital Transformation ETF (DAPP ) is up 200% (after falling spectacularly in 2022), but it’s seen really small inflows. It’s the same with other crypto-related or tech-related funds.
They’ve had spectacular performance, but investors seemed burned by 2022 or something. I do wonder if investors didn’t miss out on a huge opportunity because crypto had so many scandals recently and that kept them away
Rosenbluth: There was a lot of inked spilled by me on fixed income — but for good reason. The buying of the iShares 20+ Year Treasury Bond ETF (TLT ) even as rates were climbing has me excited that more institutions are recognizing the liquidity of fixed income ETFs.
Covered Call Strategies a Hit
Edmondson: JEPI and the covered call products are income products. After the bond debacle of 2022, investors were looking for new sources of uncorrelated, alternative income.
Nadig: 100%, Jane. My concern is that I’ve talked to plenty of advisors who latched on to equity income products because they seemed like “having your cake and eating it too.” None of these products is close to keeping up with the Magnificent Seven — by tens of percents. That opportunity cost is real.
Bell: Jane, covered call products were huge this year. Do you think investors allocated to covered call strategies rather than bonds in some cases?
Edmondson: Dave, I think with bond alternatives, as part of a diversified portfolio, some of that Magnificent Seven FOMO can be eliminated. And yes, Heather, covered calls have become the new income play, maybe not replacing bonds, but other dividend products.
The SPDR Portfolio S&P 500 High Dividend ETF (SPYD ) underperformed this year as did other dividend products due to the rising rate environment. At least with covered call strategies, you have volatility on your side and there has been plenty of that! Todd mentioned the trend
Rosenbluth: The S&P 500 Index was up 21% in the first 11 months of 2023. There are many ETFs that track factor slices of this broad market. Many investors likely realize that the +iShares S&P 500 Growth ETF+ (IVW ) was a rare one to outperform, as growth stocks had an excellent start to the year. Indeed, IVW was up 25%. However, the Invesco S&P 500 Quality ETF (SPHQ ) also climbed 19% and aided meaningful gains in November, as companies with strong balance sheets and consistent earnings performed well.
Bitcoin & AI
Roxanna Islam, VettaFi head of sector & industry research: Agreed on active & covered calls. I think the second-biggest story is spot bitcoin ETFs, especially because the sentiment in early 2023 was very anti-crypto
Edmondson: But what about AI? 2023 was the year of Generative AI as well. Besides crypto and blockchain, AI was one of the areas seeing thematic flows.
AI ETFs that delivered strong performance and captured investor attention were the ROBO Global Artificial Intelligence ETF (THNQ ), the Global X Artificial Intelligence & Technology ETF (AIQ ) and the Roundhill Generative AI & Technology ETF (CHAT ) to name a few.
The demise of some fad themes like meme stocks and SPACs was also a big story for 2023 on the thematic side.
But Heather, you are right that there was a lot of strong thematic performance from funds like DAPP. The Roundhill Ball Metaverse ETF (METV ) also comes to mind. They flew under the radar. The Amplify Online Retail ETF (IBUY ) is up 30% YTD. If it wasn’t AI or crypto, it seemed like nobody noticed.
I will say that uranium was a big winner this year thematically. It’s not tech-related, but its performance was spurred by clean energy goals.
And I just realized that we are all talking about the Magnificent 7, and coming into this year they were still referred to as the FAANG names.
Islam: The Magnificent 7 is slightly different, but I like the change. It includes Tesla, Nvidia, and Microsoft and excludes Netflix.
Rosenbluth: The Invesco S&P 500 Equal Weight ETF (RSP ) pulled in $10B this year as many advisors and investors wanted to take a less concentrated approach. I think that will continue in 2024.
Ultra-Short Surge a Possible Flash in the Pan
Heather asked initially what is a flash in a pan and will be out of favor in 2024. I think ultra-short bond ETFs like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL ) are going to be less popular. BIL’s $8 billion in net inflows this year includes $3 billion of net outflows in the past month. While there’s a lot of money still in money markets, advisors told VettaFi recently they are willing to take on more duration risk.
Edmondson: I just read that high-yield bond ETFs saw inflows in November, suggesting that in addition to extending duration, advisors are also willing to take on more credit risk.
Rosenbluth: I’m quoted in that piece saying there’s a possibility that the US Federal Reserve may start cutting rates next year, and that “high-yield funds were particular beneficiaries of this sentiment shift." There’s also low cost ETFs like the SPDR Portfolio High Yield Bond ETF (SPHY ) available for those looking to build a position
Edmondson: Floating rate fixed income ETFs also benefited last year from uncertainty about the direction of interest rates. Senior bank loan ETFs like the Invesco Senior Loan ETF (BKLN ) and floating rate ETFs like the SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN ), the iShares Floating Rate Bond ETF (FLOT ), and others saw new flows as investors hedged their bets on the direction and duration of interest rate hikes.
I wish I could remember them all! I also spend a lot of time thinking about great tickers on the index development side.
This isn’t an ETF awards program, but what was the best new ticker of 2023?
Ticker of the Year?
Crigger: As far as tickers go, I’m deeply biased but I like the Defiance Israel Bond ETF (CHAI ) which just launched this week. Very clever.
Rosenbluth: I am a fan of the ticker for the Parametric Equity Premium Income ETF (PAPI ) — a covered call ETF. Makes me think of David Ortiz
Crigger: I also thought the ticker for the VanEck Office and Commercial REIT ETF (DESK ) was pretty clever too
Rosenbluth: I also like/hate that my best friend growing up has an ETF ticker — ProShares Short Ether Strategy ETF (SETH ) — and I don’t.
The Roundhill S&P Dividend Monarchs ETF (KNGS ) is also a cool ticker for a dividend ETF
Crigger: Roundhill also struck gold with the ticker for the Roundhill Generative AI & Technology ETF (CHAT ).
Edmondson: (MAGS ) is a good upgrade from BIGT for what is now the Roundhill Magnificent Seven ETF.
Edmondson: According to Morningstar, there have been 478 new ETF launches this year. That is a lot of new tickers!
To be fair, as Todd mentioned, a lot of those were mutual fund or SMA conversions to ETF wrappers, but 76% were active ETFs? That’s crazy!
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