4 ETF Trends That Shaped 2023’s First Half

From a new-look leaderboard to spot bitcoin exchange-traded fund hopes boosting crypto prices, CFRA’s Head of Research Aniket Ullal looks at the trends that shaped this year’s first six months. 

1. Issuers of Active ETFs Shake Up Leaderboard 

After several years of domination by the “big three” ETF issuers (BlackRock, Vanguard and State Street), the market share leaderboard is now being shaken up. The first half of 2023 was a breakout period for some issuers of active ETFs, with several punching above their weight in net flow market share.  

Table 1 highlights how some firms ranked much higher in 2023 first-half flows relative to their rank based on year-end 2022 assets.  

Table 1: Top 10 U.S. ETF Issuers by Net Flows in 1H 2023 

Source: CFRA ETF Database; Data as of June 30, 2023. 

Despite being only seventh in net assets at the end of 2022, JPMorgan Chase was ranked second in net inflows in the first half of 2023. It is important to note that not all of JPMorgan’s ETF growth was driven by active ETFs, with these products accounting for $13.3 billion (i.e., 60%) of the firm’s $22.3 billion in net flows in the first half of 2023. Covered call active ETFs like the JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) were significant contributors to the firm’s growth.  

Similarly, Dimensional, Avantis and Capital Group had a share of net flows that was higher than their asset market share at the end of 2022. Their success suggests there was latent demand from their mutual fund customers to access their strategies in an ETF wrapper.  

2. Optimism Around Spot Bitcoin ETF Drives Bitcoin ETF Returns 

Crypto-themed ETFs made up the top 10 best-performing nonleveraged ETFs in the U.S. in the first half of the year. However, these ETFs were accompanied by high volatility as well, as shown in Table 2.  

Table 2: Top 10 Best-Performing Nonleveraged US ETFs in 1H 2023 

Source: CFRA ETF Database; Data as of June 30, 2023. 

Bitcoin has received a significant boost this year after BlackRock filed for a spot bitcoin ETF. Since BlackRock is the world’s largest money manager, with a strong history of ETF approvals, it has raised expectations that the Securities and Exchange Commission could finally approve a spot bitcoin ETF after 10 years of rejecting spot bitcoin applications.  

This optimism was reinforced by the SEC approving the 2x Bitcoin Strategy ETF (BITX), the first leveraged bitcoin futures ETF in the U.S. However, there are factors that could temper this positive outlook. For example, BlackRock’s ETF filing hinges on a surveillance-sharing agreement with Coinbase, a major crypto exchange. Coinbase was recently sued by the SEC for trading securities without registering with regulators. 

Also, the inclusion of a surveillance agreement in the filing may not fully address the SEC’s concern that the spot bitcoin market (unlike the bitcoin futures market) is unregulated. Given all these considerations, the approval of spot bitcoin ETFs this year in the U.S. remains a possibility, but is far from assured.  

3. ETF Investors Rotate Back into Domestic Equity ETFs in 2Q 

In the second quarter of 2023, ETF investors in the U.S. rotated heavily back into funds that provide exposure to domestic U.S. equities. ETFs with exposure to U.S. equities took in $64 billion in net new flows in the second quarter of 2023, a sharp reversal from a dismal first quarter, when these ETFs had outflows of $2.5 billion.  

ETFs providing exposure to global equities continued to have a strong performance, taking in over $48 billion in the first half of the year. Similarly, bond ETFs also continued to have strong inflows, taking in approximately $100 billion in the first half of the year.  

4. Tech & Growth Themed ETFs Lead Rebound in US Equity ETFs 

The reversal in domestic equity ETF flows was sparked by the sharp rebound in U.S. equity performance in the first half of this year. This recovery was led by technology- and growth-themed ETFs, strategies that had significantly underperformed the broader U.S. equity market in 2022.  

The chart below compares the year-to-date performance of the 11 U.S. GICS sectors as represented by the Select Sector SPDR ETFs. The Technology Select Sector SPDR Fund (XLK) was up 40% in the first half of this year, likely driven by positive sentiment around AI-related investing.  

Other high beta sectors like the Communication Services Select Sector SPDR Fund (XLC) and the Consumer Discretionary Select Sector SPDR Fund (XLY) were up 36% and 32%, respectively, in the first half of the year. The Energy Select Sector SPDR (XLE) was down 5% in the first half of 2023 after being the only GICS sector to have a positive return last year, with a total return of 59% in 2022.  

1H 2022 Returns for U.S. Sector SPDR ETFs  

Source: CFRA ETF Database; Data as of June 30, 2023. 

The risk-on environment was also reflected in the returns of factor and thematic ETFs. Growth ETFs rallied strongly in the first half, with ARKK up 41% in the first half of the year.  

Conclusion 

Overall, the ETF industry rebounded in terms of flows in the second quarter of 2022, with domestic equity ETFs in particular experiencing strong net inflows. The midpoint of 2023 was marked by a strong performance in the U.S. equity market and a risk-on investor mentality characterized by optimism around bitcoin-themed and growth-oriented technology ETFs.