What Will 2023 Hold for the ETF Industry?

From FTX to the Fed, events have kept us wildly busy reporting on 2022’s crazy ride.

Now we wonder where the coming year will take the ETF industry. Our editors and reporters, who have monitored the industry’s launches, trends, successes and flops, have each taken a few moments to scratch their heads and play Janus—gazing back and then predicting what’s next for our industry in 2023.

Sean Allocca, Editor-in-Chief: 

• Spot Bitcoin ETFs come to life. Sure, crypto has been a dumpster fire this year, but that could become the driving force for regulators to take their heads out of the sand and work to find a viable solution for investors. There are now dozens of bills in Congress on crypto legislation with multiple federal agencies engaged or seeking public comment. The SEC has already approved highly speculative leveraged, single-stock ETFs, but won't allow bitcoin ETFs because of the risks? Look for movement on spot bitcoin ETFs in the second half of 2023.  

• Asset managers jump on AI bandwagon. Artificial intelligence has been all the rage with digital personal assistants and new chatbots like Chat GPT making waves this year by making our everyday lives just that much easier. That wasn’t lost on asset managers who have offered up AI-driven, actively managed products. The latest was newcomer Kaiju ETF Advisors which launched the BTD Capital Fund (DIP) in December. Whether you believe the hype or not, more issuers will likely jump on the “AI-enhanced” bandwagon next year. 

Daria Solovieva, Managing Editor: 

• FDA’s upcoming guidelines alone won’t be enough to make Cannabis ETFs recover. While the FDA is looking to address regulation of cannabis-derived products and issue guidelines in the next few months, it may not be sufficient to lift the battered cannabis sector given declining costs of marijuana production, interest rate uncertainty and a regulatory environment where regulators can still punish banks for providing services to legal cannabis businesses. 

• ESG market will become more segmented, with ESG investors becoming more discerning and favoring more thematic ETFs. As regulators around the world come to terms with what constitutes ESG and technologies like zero-emission aviation come to market, we’ll see more thematic ESG funds emerge to cater to investors’ evolving appetites. 

Ron Day, Deputy Managing Editor: 

• What four-letter word, starting with F, will define investing to kick off 2023? The word I'm thinking of is Fear. Enduring one shock after another—from war to decades high-inflation to soaring interest rates—investors are battered. With the Fed not helping stocks, and many experts predicting a recession, investors might look at something like the Invesco S&P 500 Low Volatility ETF (SPLV), which lost 3.9% compared with 18% in the broader S&P 500. 

• Maybe the word that defines your investing strategy is Exhausted. You watched simultaneous collapses in tech, real estate and let’s not even utter the word crypto. You want out, a breather before heading into the ring again. Investors will probably flee to boring things like insurance, often a stable investment in volatile times. They might like the iShares U.S. Insurance ETF (IAK) which has gained 11% this year, or the JPMorgan Ultra-Short Income ETF (JPST) which has added 1%. 

Heather Bell, Managing Editor: 

• International stocks will outperform U.S. stocks as the anticipated recession sets in. The U.S. has dominated for about 12 years, but after 2022, non-US stocks have more room to rebound than the U.S., and many of them have better economic fundamentals. 

• Closures of actively managed ETFs will ramp up. The adoption of the ETF Rule in late 2019 opened the gates for a flood of smaller issuers to enter the space with active strategies. However, not many of them have gathered significant assets. We will likely see many of these funds shutter in the coming year. 

Shubham Saharan, Markets Reporter: 

• Bonds. Bonds. Bonds. That’s the theme for next year. As the Federal Reserve is planning to hike rates in the coming months, investors are likely to flock to fixed-income investment vehicles to seek shelter.  

• Whether spurred by SEC regulation or increased scrutiny over environmental, social and governance issues, we’ll see even more issuers take sides and politicians threaten to divest funds. As asset managers grapple with the increasing politicization of environmental, social and governance issues, there’s bound to be additional scrutiny on issuer’s movements in the space. We’ve already seen Vanguard pull out of the Net Zero Asset Manager’s initiative, while firms like BlackRock have doubled down on their commitment to ESG options for clientele. 

Zoya Mirza, Markets Reporter: 

• “Identity investing” is poised to reign supreme. Anticipated 2023 ETF launches such as the Unusual Whales Subversive Democratic Trading ETF (NANC) and the Unusual Whales Subversive Republican Trading ETF (KRUZ)—which will focus on the portfolios of Democratic and Republican Congress members, respectively—are paving the way for a new type of investment methodology and trend that promotes political discourse guiding one’s portfolio holdings. 

• Demand for exchange-traded funds will continue to outpace demand for mutual funds. Mutual fund to exchange-traded fund conversions picked up speed in 2022, with over a dozen mutual funds transitioning into ETFs, and J.P. Morgan spearheading the biggest switch in June when it rebranded four mutual funds with almost $9 billion of combined assets as ETFs. The low operating costs and tax advantages offered by ETFs have cemented the product’s status as an attractive investment vehicle.