$1T of Inflows? Sumit’s 2023 ETF Predictions

ETF.com Senior Analyst Sumit Roy offers 4 bold predictions for 2023.

2022 was a downright lousy year for investors. What might 2023 bring? 

Plenty of people believe things will get even worse in 2023, while others are equally confident things will improve.  

That’s financial markets for you: a bunch of confident people who have no idea what’s going to happen day to day or year to year. And neither do I!  

But that’s not going to stop me from making some big, bold predictions. So here goes nothing … 

Prediction 1: Annual Inflows Top $1 Trillion 

We had $614 billion of inflows for U.S.-listed Exchange-traded funds in 2022—a year that featured the worst performance for stocks and bonds in a century by some measures.  

Still, that was the second largest annual haul on record, only behind 2021’s $900 billion. Talk about resilience! 

That tells me ETFs are still very much a growth industry. They’re still taking assets away from mutual funds and they’ve essentially become the go-to way for individuals and institutions to invest. 

I’m not foolish enough to try and predict exactly what the markets will do. But I do know that 80% of the time after a down year in the stock market, markets rise the following year. Likewise, bonds, which had their worst year in modern history in 2022, might be due for some relief (assuming inflation comes down).  

And if we do see a better year for markets in 2023, it wouldn’t be surprising to see inflows into ETFs reaccelerate.  

Prediction 2: Anti-Woke/Anti-ESG ETFs Gain Traction 

The ESG movement has grown unimpeded over the past several years. Fund managers love this because it helps them sell products, and investors love it because it makes them feel good.  

The iShares ESG Aware MSCI USA ETF (ESGU) grew from a $200 million fund to a $20 billion fund in just three years. I don’t think ESG is going to slow down anytime soon, but I do think its days of being unimpeachable are over. 

Enter the anti-ESG, or anti-woke movement. Like everything else in life, the asset management industry has been pulled into the culture wars, and ESG is the latest battleground. New ETF issuer Strive saw tremendous success with its Strive U.S. Energy ETF (DRLL), an unoriginal and expensive fund that’s pulled in $375 million for merely ideological reasons (though Strive might say the same thing about the success of ESGU and other ESG-focused ETFs).  

I don’t think anti-ESG is going to be anything close to the colossus ESG is today, but there seems to be a decent-sized cohort of people so turned off by ESG that they’re willing to go out and pay a premium for explicitly anti-ESG ETFs.  

Intense anti-ESG rhetoric from presidential hopefuls like Ron DeSantis and Mike Pence in the lead-up to the 2024 presidential elections will only add fuel to the fire. 

Prediction 3: Single-Stock ETFs Are a Bust  

These ETFs came to market with a decent amount of media attention last year, but they’ve been a big disappointment—something I don’t see changing in 2023. 

Leveraged (and inverse) ETFs thrive on volatility and some traders’ desire for excitement. But those traders already have that with leveraged index ETFs and even leveraged commodity ETFs. 

Leveraged single-stock ETFs don’t offer anything new or better—just less diversification and more risk.  

On top of that, they’re limited to 2x leverage due to rules put in place by the SEC in 2020. That gives the older 3x ETFs tied to indexes and commodities (which were grandfathered in) a leg up in attracting volatility-hungry traders.  

Prediction 4: ARKK Has Net Inflows 

If investors in the ARK Innovation ETF (ARKK) didn’t give up on Cathie Wood last year, when the fund nosedived 67%, why would they give up on her now? I don’t know; maybe 2023 ends up being even worse for ARKK and investors finally abandon ship. But somehow, I doubt they will. 

ARKK had $1.2 billion in inflows last year after $4.8 billion of inflows in 2021—both down years for the fund. 

I’m predicting we’ll see more assets enter the fund in a year that could deliver better performance for the ETF now that it’s down 80% from its highs.  

Someday, ARKK might lose its luster and slowly start to bleed assets. I think its downfall would likely come as the result of apathy (potentially as a result of investors chasing an ETF managed by the next new hot fund manager). But I don’t think that day has arrived.  

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2