3 ETF Trends to Watch This Year

January 04, 2023

Terry Ritchie

From the war in Ukraine to high inflation, from contentious U.S. midterm elections to steep declines in the equity and fixed income markets, 2022 ushered in a host of disruptive and troubling events. 

As we put that troubled year into the record books, we offer three exchange-traded fund trends that could emerge in 2023, and our reasoning for each. 

Moderate to higher-risk investors might return to equity ETFs. 

After equity ETFs shed significant market cap last year, many investors may see they offer attractive valuations for the growth they could provide.  

In looking at year-to-date performance for a selection of sectors within the S&P 500 through Oct. 30, 2022, the communication services sector was down 39.04%, information technology was down 31.44% and consumer discretionary was down 29.89%.  

Some investors will hope to catch a rebound in 2023 in equity ETFs, with a particular focus on sectors that recently underperformed the broader U.S. market. 

Other investors may have reviewed their asset allocation at the end of 2022 and discovered they were underallocated to equities, after sharp 2022 equity losses. This could drive additional allocations to equity ETFs as investors rebalance their portfolios to target levels. 

The stock market is typically a leading indicator as an economy emerges from recession. With that, some investors will hope to ensure they are positioned to enjoy a potential run-up in stocks before the broader economy resumes its normal growth rate. This, too, could drive equity ETF interest. 

Conservative investors increasingly buy fixed income ETFs

The main reason conservative investors could have newfound excitement for fixed income ETFs is that yields are higher than they’ve been in years.  

With rates close to 0% in recent years, the TINA (“there is no alternative”) effect was in full force, as equities were viewed by most as the only place to earn decent returns. These investors will now be quite satisfied with nominal yields in the 4%–5% range on investment-grade fixed income. This enthusiasm could drive increased flows into fixed income ETFs. 

Additionally, with the size of the equity market correction in 2022, conservative investors may be cautious about reentering the equity market, and as a result, may be more likely to put new money to work in fixed income ETFs. 

Outcome-oriented ETFs may attract more assets than ever. 

Investors report wanting professional money managers to employ options to limit equity market downside, and we’ve seen significant ETF product development in this area over the last few years.  

After 2022’s volatility, investors who still want equity market exposure are more willing to give up some upside performance in return for the certainty that they are protected from equity market downside. Expect to see more launches and growing sales into these types of ETFs. 

Other outcome-oriented ETFs that we could see in 2023 are those focused on certain themes, such as yield.  

We have seen increasing numbers of investors requesting equity ETFs that offer attractive yields, and we expect this trend may continue in 2023. Should equity markets deliver negative returns in 2023, some investors may view this dividend income as their living expenses during retirement, while others see the yield as a shock absorber. 

 

Nick Elward is a senior vice president and head of institutional product and ETFs in the Strategic Product and Marketing group at Natixis Investment Managers. 

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