In 2022, investors faced every headwind imaginable with inflation at 40-year highs, soaring interest rates, the war in Ukraine, and battered investor sentiment leading the S&P 500 Index to end the year at a nearly 20% loss (the worst since 2008). Nasdaq tumbled 33%, and bonds endured their worst year in history. The double whammy of equities and fixed-income investments falling at the same time did not—surprisingly—prevent investors from increasing the ETF usage in portfolio construction. ETF net inflows topped $590 billion¹ in 2022, the second-best year of ETF inflows to date.
Equity ETFs saw $336 billion in net positive inflows, while fixed-income ETFs garnered $197 billion in positive cash flows despite challenging performance. Alternative strategies, miscellaneous and nontraditional equities also doubled inflows in 2022 from 2021, $60 billion versus $32 billion. Commodities drastically failed to recapture the 2020 popularity of the asset class by seeing $4 billion in outflows.
Comparatively, mutual funds were not able to withstand the same headwinds as ETFs, marking 2022 as the greatest outflow on record: $958 billion.² Equity mutual funds shed $365 billion. Fixed-income mutual funds, which historically have been more resilient to redemptions, bled $531 billion. Alternative strategies was the only category group within the mutual fund universe to record positive flow of $13 billion. Investors moved some of their money to safe havens during the volatile market, but a lot of it was also recaptured by ETFs via tax-loss harvesting trades. The contrast between the two vehicles has never been greater than what we witnessed in 2022, suggesting investors took this opportunity to shift toward a cheaper and more tax-efficient vehicle—the ETF.
ETFs Under the Microscope: Geography, Size and Sectors
U.S. equities dominated again with close to $255 billion in net new cash flow. And, even with the global turmoil impacting European countries and China’s zero-COVID policy bringing negative outlook on Asian markets, international equities had a healthy $95 billion in net cash flow.
Large-cap ETFs took in the lion’s share of cash flow: $266 billion. Small caps added another $20 billion, and mid caps had $18 billion in flows.
Sector rotation was visible in 2022 with the overall results leading to $13 billion in outflows from sector-dedicated strategies. Some of the most favored sectors in 2021 lost favor in 2022 and vice versa. The health care sector was the biggest benefactor as investors allocated close to $12 billion. Consumer defensive and utilities also had a good year adding roughly $14 billion to their totals. Meanwhile financials saw significant outflows of $13.5 billion. Consumer cyclical and technology lost $9.5 billion and $6 billion, respectively.
What a Year for Strategic Beta³ ETFs!
Not only did strategic beta ETFs’ flows outpace 2021 by adding $138 billion in 2022 versus $126 billion last year, this investment style also came very close to matching the flows of pure passive equity funds, which saw net flows of $156 billion. Dividend-focused strategies marked 2022 as their best year of all time, adding close to $70 billion last year, which is more than all other dedicated factor strategies combined. Value and growth factor ETFs had $18 billion and $23 billion in net inflows, respectively. Risk-oriented funds also saw a respectable gain of $9.5 billion, a reversal from 2021 when these types of funds lost $13 billion.
Pay Attention to Active ETFs
One of the key trends in 2022 includes a mini boom of active strategies inside the ETF wrapper. Close to 64% of new launches were active ETFs. In addition, this segment experienced a 30% organic year-over-year growth rate, nearly tripling the 8% growth rate of ETFs overall. The $88 billion added to active ETFs tops the prior record achieved in 2021. Active equity strategies saw $43 billion in net new flows, while nontraditional equities and alternatives saw $34 billion cumulatively. Interestingly, nontraditional equities and alternatives were categories where active completely dominated its passive counterparts. Over 90% of the total net flow into these categories was through active vehicles.
What Happened to Thematic ETFs?
After years of rising popularity, thematic ETFs have reported collective outflow of $10 billion. A lot of flows can be attributed to poor performance and investors’ rotation to lower-risk securities as thematic funds are often intertwined with unprofitable, high beta names. The largest outflows were from cryptocurrency economic strategies, which lost close to $3 billion.
The Fixed-Income Comeback
Fixed income experienced its worst year of performance in history, yet fixed-income ETFs managed to have an outstanding year. Investors allocated $197 billion to various fixed-income categories, as the ETF enabled easy and efficient repositioning of portfolios in response to changing Federal Reserve policy and rising yields. It is likely that fixed-income ETFs were a benefactor of tax-loss harvesting trades considering their net flow gains, while fixed-income mutual funds lost $531 billion.
Taxable bond funds on the shorter maturity spectrum took in $75 billion, with $57 billion going to ultrashort strategies with a duration of less than one year. Intermediate bond ETFs added $53 billion, and long-term bond ETFs gained $37 billion. Corporate bond ETFs had a healthy inflow of $8 billion, which is a strong turnaround from $5 billion in outflow in 2021. Bonds tied to rising inflation expectation recorded net outflows as inflation started to peak. Treasury Inflation Protection Securities (TIPS) lost $11 billion, and bank loans had $4 billion in outflows.
Municipal ETFs added $30 billion, outpacing the 2021 net flow of $21 billion. The lion’s share, $22 billion of municipal flows, was directed to intermediate funds. Short-term municipal funds also had positive $5 billion net inflow, while other categories such as high-yield or long-term municipals saw very muted demand.
ETF Launches Falter—But Not by Much!
Due to Securities and Exchange Commission approval of single-stock ETFs and more active issuers entering the ETF arena, 2022 came very close to beating 2021 for new ETF launches. In 2021, 446 new strategies were added to the ETF universe, topping 2022’s total of 413 by only 30. As mentioned, 64% of the launches were active ETFs—a record year. Also, active strategies garnered the most assets out of all the new launches last year.
ETF Issuers on the Move
American Century Investments is now one of the top 20 largest ETF issuers, reaching close to $19 billion in net assets. In the month of December, American Century Investments added $1.3 billion, bringing the total net flow in 2022 to $11 billion. By all accounts, this is a very strong showing from American Century ETFs by outpacing some of the more established ETF issuers.
American Century Investments crossed the $21 billion threshold and moved to #18 on the largest issuer list as of January 31, 2023.
Here is a summary of the top 20 ETF issuer landscape:
**Net flow is YTD for year 2022. Source: FactSet as of 12/31/2022.
Forging Ahead in 2023
Uncertainty in the market and economy remains high, and investors are likely to be tested to maintain investing habits in the market considering these headwinds. We are confident that the ETF industry will continue to meet the challenges as more investors recognize the benefits of these low-cost, tax-efficient vehicles. With the flexibility ETFs offer in portfolio construction, the industry is continuing to innovate to provide additional solutions for investors’ portfolios.
Asset and flow data as reported by Morningstar Direct as of 12/31/2022. Excludes money market and fund-of-funds.
Morningstar Direct as of 12/31/2022. Excludes money market and fund-of-funds.
Strategic beta ETFs defined by Morningstar Direct that track indices that use criteria other than company or issuer size to determine portfolio holdings. As of 12/31/2022.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
Exchange Traded Funds (ETFs): Foreside Fund Services, LLC - Distributor, not affiliated with American Century Investment Services, Inc.