Usage of exchange-traded funds (ETFs) continues to grow. Total assets for U.S.-listed ETFs topped $6.89 trillion as of November 2021, according to the Investment Company Institute (ICI). Assets grew by more than 32% last year.

Another way to look at growth among ETFs is to consider net issuance. Net issuance is the value of shares issued less the value of shares redeemed. During the first 11 months of 2021, a net $822 billion worth of shares were issued. This compares to $441 billion for the first 11 months of 2020, based on ICI data. Net issuance was positive for domestic equity, global/international equity, bonds and commodities ETFs. Increases in net issuance signal greater demand, and net issuance has doubled year over year in 2020 and 2021.

For individual investors, no-commission trading has kept the cost of trading ETFs low. Discount brokerage firms offer individual investors the ability to buy any U.S.- listed ETF for $0 commissions. Other trading costs continue to apply, including bid/ask spreads and capital gains taxes. Depending on the ETF, individual investors may also pay a premium or discount to the ETF’s net asset value (NAV).

Trends in Performance

One of the popular stories for the year with ETFs was the approval by the U.S. Securities and Exchange Commission (SEC) of the ProShares Bitcoin Strategy ETF (BITO), which holds bitcoin futures.

While the ProShares Bitcoin Strategy ETF is too new to have a performance record, other cryptocurrency-related ETFs were top performers in 2021 (Table 1). This performance is driven by the attention the cryptocurrency market has drawn. The Grayscale Ethereum Classic Trust (ETCG) returned 492.7% in 2021, followed by the Grayscale Ethereum Trust (ETHE) with a return of 391.1%.

Performance for both of these ETFs only goes back to 2018, pointing to their nascence. Without long-term performance, it is hard to compare them to other investment options with longer performance records.

ETFs should always be compared against category peers, as well. The new cryptocurrency-related ETFs are in the miscellaneous trading category. Not enough cryptocurrency-related ETFs have been launched so far to justify the creation of their own separate category.

Commodity focused and equity energy ETFs posted comeback performance compared to 2020, taking up a large portion of the list of top-performing ETFs for the year. Demand has returned from the price bottom that oil reached in 2020.

First Trust Natural Gas ETF (FCG) returned 98.8% in 2021 compared to a 23.3% drop in 2020, making it the top-performing equity energy ETF on the list of top-performers. Invesco’s Dynamic Energy Exploration & Production ETF (PXE) followed with a return of 93.9% for 2021 compared to a 36.8% drop in 2020.

Worth noting is the Breakwave Dry Bulk Shipping ETF (BDRY) as the third-best performing ETF for 2021 with a return of 273.8%. Its portfolio points to the importance of industry and sector performance during the coronavirus pandemic, as this fund is related to events in the global supply chain.

Bottom-performance trends were concentrated around international ETFs, especially those with ties to China (Table 2). KraneShares CSI China Internet ETF (KWEB) was the worst-performing ETF on the bottom-performers list from the China Region category, down 49.3% for 2021. This compares to a positive return of 59.7% in 2020.

Cannabis ETFs were also among the bottom-performers for the year, with Global X Cannabis ETF (POTX) the worst, down 38.9% for 2021. Cannabis funds rose on the hope that federal decriminalization of the drug would create further business growth as the Biden administration came into office. A specific policy decision has yet to be announced, and these cannabis funds are down from their previous excitement.

Active ETFs’ Small Traction

As of year-end 2021, there were 791 exchange-traded funds not designated as being index ETFs by Morningstar, which provides our data. This is up from 501 in 2020. The median assets under management (AUM) for actively managed ETFs is $43 million. About one-third of all non-index ETFs have attracted $100 million or more in assets.

There are some exceptions. Fifty-seven actively managed ETFs have total assets in excess of $1 billion. Almost half of these are bond ETFs. One of the oldest actively managed ETFs, PIMCO Enhanced Short Maturity Active (MINT), is the fourth-largest at $13.7 billion in assets. It is surpassed in size within the fixed-income asset class by JPMorgan Ultra-Short Income (JPST), which has $18.5 billion in assets.

The second-largest actively managed ETF is the ARK Innovation ETF (ARKK), with about $16 billion in assets. ARK Innovation was one of the best performers in 2020 but fell in value by 23.6% in 2021. The thematic ETF targets companies that it defines as being engaged in “disruptive innovation.” It holds a concentrated portfolio, with its top 10 holdings accounting for more than 50% of the total portfolio. ETFs with highly concentrated portfolios expose investors to more security-specific risk. A drop in one or two top holdings could cause the entire ETF’s performance to suffer.

Vanguard and iShares Continue to Dominate

Vanguard and iShares continue to be the largest players in the ETF space. This concentration of assets can be seen in the list of the largest ETFs (Table 3). The two firms account for 38 of the 50 largest ETFs, a small decrease from last year.

On this list Vanguard’s ETFs have total assets of about $1.6 trillion, and BlackRock’s iShares ETFs have total assets of about $1.3 trillion.

Notably, the largest ETF is also the oldest. SPDR S&P 500 ETF Trust (SPY) has assets of $455 billion. It was the first exchange-traded fund ever launched in 1993.

About This Year’s Guide

For the second year, our annual guide to exchange-traded funds is being published in February alongside our annual guide to mutual funds. For many AAII members, this facilitates easier comparisons of similar mutual funds and ETFs.

This year’s ETF guide makes use of the data and tools available to members on AAII.com, which enabled the combination to occur. They include our ETF grades and category averages. Data on more than 2,800 U.S. ETFs is updated monthly and is available to all AAII members.

The print and PDF versions of this guide provide data on 400 ETFs of broad interest to U.S. investors. Key data on individual ETFs is displayed on a single page, covering a broad range of asset classes, fund groups and categories. You will find key data, including calendar-year and annualized returns (based on NAV), yield, expense ratio and portfolio turnover.

Category averages and ETF grades are listed to help you quickly assess whether a particular fund’s annualized returns are above or below its peers. The category averages provide a peer-based benchmark to compare a given fund against. They allow you to quickly see if a fund is more attractive or less attractive than the other funds in a particular category.

The grades range from A to F. The scale works just like it did when you were in school, A’s are good, while F’s are bad. Each of these grades is tied to a percentile rank based on how a specific ETF compares to its category peers. An ETF’s average annual return for a given period that ranks in the top quintile (best 20%) relative to its category peers will receive a grade of A. Lower grades are assigned for lower quintile rankings. So, a grade of C means the ETF’s average annual return for a certain period was about average compared to its category peers (the 41st to 60th percentile).

In the print version of this guide, grades are provided for three-, five- and 10-year annualized returns. Online, grades are provided for additional periods as well as for category risk and expense ratio (for these two figures, the lower the rank, the higher the grade).

There is also far more detailed information provided about each ETF online. At www.aaii.com/etfs/guide, you will find details about which index an ETF tracks, its portfolio allocation, beta for equity ETFs, interest rate sensitivity (how sensitive an ETF’s returns are to changes in interest rates) for bond ETFs, inception date and whether it uses leverage or is otherwise an inverse ETF. This data is updated monthly and can be downloaded to spreadsheets: Click on the “Excel” button located on the right-hand side.

All AAII members can also track ETFs they own or are most interested in with My Portfolio at www.aaii.com/myportfolio. Clicking on a fund’s name or ticker (or typing either into the search box located at the top of most pages on our website) will call up our ETF evaluator. This page provides valuable information and data about the fund you are most interested in.

Which ETFs Were Included

Exchange-traded funds appearing in this guide are listed on U.S exchanges. The following explains the criteria we used to screen for and then identify which ETFs to include in the print and PDF versions of this guide.

Categories

The starting point for determining which categories to include were the ETF groups matching our Asset Allocation Models. The stock and bond ETFs comprising these groups are also those most frequently held in individual investors’ portfolios. We then expanded the list of ETF categories to cover those of interest to a large number of investors. This latter group includes sector ETFs, high-yield bond ETFs and allocation ETFs. To the extent possible, we included categories similar to those appearing in the mutual fund guide.

Historical Record

ETFs were generally required to have three full years of data to be included in Table 4. This requirement ensures that there is a performance record of significant length and that all performance measures can be calculated. Exceptions were made for certain ETFs whose size makes them of interest to a large number of investors.

The requirement for three years of return data was loosened for the listings of the best- and worst-performing ETFs (Tables 1 and 2) to provide a more direct comparison with our quarterly ETF updates, which will be included in the May, August and November issues of the AAII Journal.

Size

All ETFs were generally required to have at least $1 billion in assets. This is up from the $750 million requirement used last year. (Large-cap ETFs were required to have at least $1 billion of assets in the 2020 guide.) The size requirement was loosened for the top and bottom performers (Tables 1 and 2).

Expenses

Due to the generally lower cost of ETFs, a cap on expense ratios was not used. Only a small number of the ETFs appearing in the print and PDF versions of this guide have expense ratios of 0.70% or higher.

Performance

To include a larger number of ETFs, performance requirements were not applied. The majority of the ETFs appearing in this guide have three-year annualized return grades of C or better. Such ETFs either outperformed their category peers or have three-year annualized returns similar to their peers.

Interest and Availability

Only those ETFs that are of general interest and are available to individual investors are included.

Go to AAII.com for More Information on ETFs

AAII members who would like additional details on the ETFs included in the print version of this guide or who would like to see the ETFs that did not appear in the print version can access this information at www.aaii.com/etf-guide, where data on more than 2,800 exchange-traded funds can be found.

Additional analysis can be conducted with our Compare ETFs tool at the Investing Ideas page. You can use it to compare and contrast return, risk and turnover information for two or more ETFs. 

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