Mid-Year 2022 ETF Trends to Watch

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At the midpoint of each year, we lay out our predictions of key ETF trends to watch. We also take this opportunity to reveal whether our predictions from the prior period materialized. Let’s see how accurate our early 2022 trend predictions were…

The three trends we identified at the beginning of 2022 are as follows.

Trend #1 – We Will See a Spot Cryptocurrency ETF Launch.
With increased investor interest in cryptocurrency, and some nations (including Canada) allowing products to launch, we expected US regulators would build an oversight framework allowing for a spot cryptocurrency ETF. While futures-based cryptocurrency ETFs launched, we haven’t seen any ETFs investing directly in cryptocurrency coins (spot) approved. In fact, a sizable fund that requested approval was rejected in late June. With substantial market upheaval in the first half of 2022, amid inflation and the war in Ukraine, it appears the SEC could take longer to decide if they will permit a spot cryptocurrency ETF.

Trend #2 – ETFs’ Tax-Efficiency Will Remain Unchanged.
We were right on this one! In Q3 and Q4 2021 there was speculation that the US Congress might eliminate the ability for ETFs to utilize the creation and redemption process to minimize taxes for ETF investors. As members of Congress looked for ways to pay for their infrastructure bill, they saw eliminating the ETF tax benefit as a great revenue generator. Fortunately, they did not pursue this path and found other sources to fund their infrastructure bill.

Trend #3 – Active ETF Assets Will Double From Year-End 2020’s Level.
Active ETF assets were about $200 billion at the end of 2020. We predicted assets would double to $400 billion by the end of 2022. As of the end of May, active ETF assets were about $300 billion (according to Strategic Insight and Simfund). While our prediction hasn’t materialized yet, there’s a good chance that active ETF assets will double by year-end.

With our report card completed, let’s move to our three predictions for the second half of 2022.

Trend #1 – Greater Interest in Active Over Passive ETFs.
With extreme uncertainty in financial markets, headlined by questions over the Fed’s ability to orchestrate a “soft landing” for the US economy, turning one’s savings over to a simple index ETF (which is rules-based and carries no ability to react to market conditions) may carry more risk than some investors are willing to take. Based on our recent discussions with financial advisors and investors, increasing numbers are seeking out adept active managers to navigate this uncertainty. As we think this trend will continue and advance, we expect a higher ratio of active net flows relative to passive net flows in the second half of 2022 relative to 2021.

Trend #2 – More Buying Interest in Growth Over Value ETFs.
Large-cap growth ETFs returned an average of -28.79% in the first half of 2022 vs. -10.23% for large-cap value ETFs, according to Morningstar Direct as of June 30, 2022. We’ve also seen several individual companies’ stocks (Meta, Netflix, and others) lose quite a bit more. As investors look to find true value, they will likely see growth stocks and growth ETFs as good investment opportunities with an attractive entry point. Certainly, this could be risky should a soft landing not be orchestrated, but it’s a risk that could be handsomely rewarded if US inflation can be tamed and the US economy snaps back quicker than some expect.

Trend #3 – Buyers’ Preference for Short Duration Fixed Income Over Long Duration Fixed Income ETFs.
While we often hear that the expectation for continuing rising interest rates is “priced into the markets,” we question whether investor behavior will follow this high-level assertion. In a nervous fixed income market as we’re seeing in 2022, highlighted by significant losses that many fixed income ETFs posted in Q1 2022, investors will likely remain cautious for the rest of the year. We expect investors will see the rising bond market yields, together with the 2-year and 10-year US Treasuries having very similar yields, and decide to “clip” the attractive yield of short duration bond ETFs and hold off on betting on long duration bond ETFs.

We look forward to checking in at year-end to see how our predictions played out for the second half of 2022.