ETF Investors Are Missing Out on These 3 Themes

ETF Investors Are Missing Out on These 3 Themes

Currency hedges, bitcoin and tech funds have performed well year to date.

Reviewed by: Lisa Barr
Edited by: Mark Nacinovich

Net inflows into U.S. ETFs have been relatively low this year at $271 billion through Aug. 28, compared with $605 billion for all of 2022 and $940 billion in 2021. Historically, flows into exchange-traded funds have tended to lag performance, because retail investors and model portfolio managers rebalance only periodically in response to market changes.  

Flows did progressively gain in strength after the first quarter, in response to the 17% gain in the S&P 500 through Aug. 28. Despite that pickup, ETF flows have been low or even negative in some categories that have experienced strong returns. This includes several ETF categories that are benefiting from macro- or sector-specific trends this year and that investors should be paying closer attention to.  

Currency-Hedged ETFs 

One category that merits more attention is currency-hedged ETFs. Last year, the ICE U.S. Dollar Index appreciated 8% in response to the Federal Reserve’s rapid rate hikes. Consequently, currency hedged international ETFs significantly outperformed their unhedged counterparts in 2022.  

For example, Figure 1 shows how the iShares Currency Hedged MSCI Japan ETF (HEWJ) has significantly outperformed the unhedged iShares MSCI Japan ETF (EWJ) from January 2022, through Aug. 28, 2023.   


Figure 1: Relative Performance of Currency Hedged & Unhedged Japan Equity ETFs 

Source: CFRA ETF Database; Data as of August 28, 2023.   


Very few ETF investors took advantage of last year’s significant outperformance of currency hedged strategies. As we can see in Table 1, although the U.S. dollar appreciated against the Japanese yen, euro, and the British pound in 2022, ETFs that protected against this dollar strength had outflows last year.  


Table 1: Flows into Currency Hedged and Unhedged ETFs for Japan, Europe, and UK Exposure 

 20222023 YTD
 JPY ExposureEUR ExposureGBP ExposureJPY ExposureEUR ExposureGBP Exposure
USD performanceUp 16%Up 6%Up 12%Up 10%Down 1%Down 4%
Flows into currency hedged ETFs$767M outflow$1,020M outflow$0.5M outflow$744M inflow$61M inflow$5M outflow
Flows into unhedged ETFs$512M inflow$9,984M outflow$453M inflow$5,083M inflow$5,916M inflow$519M outflow


In 2023, U.S.-based ETF investors have rotated heavily into international exposure, and so paying attention to currency movements will be important. This year, the U.S. dollar has continued to strengthen against the yen, and if the trend continues, currency hedging could be an effective strategy for Japanese exposure.  

Investors haven’t fully taken advantage of the trend, even as Japan currency hedged products outperformed equivalent unhedged products by 17% year to date through Aug. 28. Through Aug. 28, unhedged Japan ETFs have taken in over $5 billion in inflows while hedged products have taken in a relatively modest $744 million. 

For other regions and currencies, the trend has been more nuanced. As we near the end of the rate hiking cycle in the U.S., dollar strength has moderated against the euro and the British pound, and so the benefit of currency hedging may not be as great as it was before. Nevertheless, given the flows into international equity ETFs this year and the important role of currency movements in returns, currency hedged products are a category that investors should monitor more closely.  

Potential Boost to Crypto-Themed ETPs From Grayscale Court Ruling 

Fintech is another ETF category that hasn’t had significant inflows this year but that could benefit from recent industry developments. On Aug. 29t, the U.S. Court of Appeals for the D.C. Circuit ruled in favor of Grayscale Investments in its case against the Securities and Exchange Commission.  

Grayscale had previously applied to convert its Grayscale Bitcoin Trust (GBTC) into an ETF, a request that was denied by the SEC. The SEC had also denied all past applications from ETF issuers for spot bitcoin ETFs. The court deemed the SEC’s denial of Grayscale’s spot bitcoin ETF to be inconsistent with its prior approval of bitcoin futures-based ETFs. 

Anticipation around this ruling has been driving up crypto-related ETF returns this year, making them one of the best-performing ETF categories. And yet ETF investors have been cautious about crypto ETFs. Table 2 lists some of the major fintech- and crypto-themed ETFs and highlights how flows have been low or negative through Aug. 28, a day prior to the court ruling on Grayscale, despite the strong returns.  


Table 2: Returns and Flows Into Crypto and Broader Fintech-Themed ETFs

ETF NameTickerAssets ($M)YTD Return (%)YTD Flows ($M)1 Month Flows ($M)
Broader Fintech Themed ETFs
ARK Fintech Innovation ETFARKF$857M40%- $50M- $42M
Global X FinTech Thematic ETFFINX$358M10%- $86M- $20M
Grayscale Future of Finance ETFGFOF$5M55%- $0.3M$0
Crypto Futures or Blockchain Themed ETFs
ProShares Bitcoin Strategy ETFBITO$936M50%$306M- $21M
Amplify Transformational Data Sharing ETFBLOK$467M39%- $26M- $13M
Global X Blockchain ETFBKCH$69M101%- $2M- $3M


It is still unclear what and when the SEC’s next step will be on spot bitcoin ETF approvals in the light of the latest court ruling. The court decision, however, does significantly enhance the likelihood of these products being approved either this year or in early 2024. The launch of spot bitcoin ETF would make the crypto asset class more accessible to the retail market and could lead to broader interest in the category. 

ETF Investors Still on Sidelines of Tech & AI Run-Up 

Finally, another category where ETF investors haven’t moved significant new money into is tech- and AI-themed ETFs. One of the stories of this year has been the rapid run-up in megacap tech stocks driven by optimism around artificial intelligence. The segment received a boost last month when Nvidia (NVDA), a semiconductor company that makes chips used in AI tools, reported stronger-than-expected quarterly earnings.  

As shown in Table 3, however, ETF investors haven’t moved significant amounts of money into ETFs in the AI category. For example, despite the 38% increase in the Invesco QQQ Trust (QQQ), the fund had outflows of $8.5 billion in the trailing one month and had $3.1 billion in outflows year to date, through Aug. 28.


Table 3: Returns and Flows Into Key Tech and AI Themed ETFs

ETF NameTickerAssets ($M)YTD Return (%)YTD Flows ($M)1 Month Flows ($M)
Invesco QQQ TrustQQQ$198,000M38%- $3,118M- $8,443M
Invesco NASDAQ 100 ETFQQQM$13,880M38%$5,517M$39M
Vanguard Information Technology ETFVGT$51,785M35%- $1,213M$519M
Technology Select Sector SPDR FundXLK$49,298M37%- $2,118M$77M
Global X Robotics & Artificial Intelligence Thematic ETFBOTZ$2,228M27%$613M- $78M


There are several possible explanations for why ETF investors are still on the sidelines of this tech turnaround. After the big downturn in 2022, many investors moved into safer instruments like money-market funds. Some of that money hasn’t yet come back into riskier categories, perhaps because of concerns that the Fed will keep interest rates high as inflation remains far above its 2% target. 

There may also be valuation concerns about mega-cap stocks like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Nvidia after their price gains this year. ETF investors may take a wait-and-watch attitude over the next few weeks on the ETFs that hold these stocks. CFRA now has either buy or strong buy ratings on all four of those stocks.  


Flows into ETFs in the U.S. have picked up this year after a very slow first quarter. After last year’s tech downturn, however, ETF investors have been slow to move into risk-on categories and have largely been on the sidelines of the run in the AI-driven appreciation in tech stocks.  

There are other categories that ETF investors have not yet fully participated in and that warrant more attention to, including currency-hedged ETFs, particularly for exposure to Japanese equities. A recent positive court ruling on Grayscale’s application to convert its bitcoin trust into an ETF may also drive further interest into fintech- and crypto-themed ETFs, which have had negative flows this year.  

Aniket Ullal heads CFRA’s ETF data and analytics business. He has worked in the ETF industry since early in its development. Ullal founded First Bridge, one of the industry’s leading ETF data sets that was acquired by CFRA in 2019. Previously, he was the product head for U.S. index products at S&P Dow Jones Indices.