• Digital assets, technology and growth categories dominated the 50 best-performing ETFs in 2023
• ETF flows were driven by trends such as passive investing, professional use and tax efficiency
• Actively managed ETFs saw an increase, with tax efficiency a key factor, but they tend to be smaller

Exchange-traded funds (ETFs) gained steam in 2023. Net ETF flows—the difference between dollars invested and dollars taken out—totaled $598.3 billion in 2023, according to Morningstar. This is on par with net flows of $597.9 billion for 2022. Both are 33% less than $902.6 billion in net flows that ETFs realized in 2021. Attractive yields in money market funds and other short-term cash assets damped 2023 inflows.

ETF returns mostly rebounded back into positive territory. Within the equity asset class categories included in the print version of this guide, only the utilities and miscellaneous sector categories realized losses in 2023. (In comparison, only two categories realized gains in 2022.) On the fixed-income side, all categories posted gains. In total, just under 13% of all ETFs with full-year returns fell in value in 2023, compared to 90% with negative returns for 2022.

There are three broad trends driving growth in ETF flows. The first is the ongoing shift toward passively managed investments. The majority of ETFs, and particularly the largest ETFs, continue to track indexes. Out of our universe of approximately 3,300 ETFs, 60% track an index. The second trend is the use of ETFs by financial advisers, asset allocators and tactical portfolio managers. ETFs provide targeted exposure at low expenses in a vehicle that can be easily traded, thereby lessening the need to handpick individual securities. The third trend is the comparative tax-efficiency of ETFs relative to mutual funds.

The preference for tax-efficiency is exhibited by the increase in the number of actively managed exchange-traded funds. There were 1,362 ETFs in our universe not designated as index ETFs by Morningstar at the end of 2023, 30% more than at the end of 2022. The median tax-cost ratio for actively managed ETFs in existence long enough to calculate it is 0.7%.

These funds tend to be neither large nor cheap as a group. The median actively managed ETF had $52.5 million in total assets and charged an average expense ratio of 0.73%. (Pushing the median for total assets upward were 95 actively managed ETFs with at least $1 billion in total assets.) Approximately 12,000 shares of the median actively managed ETF were traded on the average day.

Actively managed ETFs expanded their reach in 2023, representing $131.1 billion in flows. BlackRock and Vanguard, the two largest providers, launched actively managed fixed-income ETFs in what the industry sees as a potential growth area. Vanguard’s patent on its hybrid mutual fund/ETF structure expired in May 2023, which may open the door for active fund managers to offer ETF share classes. Dimensional Fund Advisors and Fidelity have both applied for this structure but have yet to be approved by the U.S. Securities and Exchange Commission (SEC).

Digital Assets and Technology Rack Up Gains in 2023

The 50 best-performing exchange-traded funds are presented in Table 1. All but five of these ETFs are from the digital assets, technology or growth categories. Many of the top digital assets ETFs are cryptocurrency related. These ETFs experienced explosive growth during 2023 due to the speculation that providers who had submitted applications to sell U.S. spot bitcoin ETFs would be approved.

One of these cryptocurrency-focused funds, the Valkyrie Bitcoin Miners ETF (WGMI), was the top-performing ETF in 2023, with a 304.1% gain. The actively managed fund invests in companies involved in bitcoin mining and those that provide specialized chips, hardware and software or other services to companies engaged in bitcoin mining. The ETF was launched in early 2022 and lacks a track record. The total risk index metric requires three years of performance, so it’s not yet available either. The expense ratio of 0.75% is in line with other actively managed ETFs. Other big winners in 2023 include the VanEck Digital Transformation ETF (DAPP), which gained 280.4%, and the Global X Blockchain ETF (BKCH), which gained 271.0%. Both ETFs lost 85% in 2022, displaying incredible volatility.

As hot as technology was last year, it couldn’t catch the digital assets category. The best tech performer was the ARK Next Generation Internet ETF (ARKW), which rebounded to positive 97.0% after losing 67.5% in 2022. The ETF’s historical volatility has earned it one-, three- and five-year A+ Investor grades A, F and D.

The top dog for growth is also an ARK ETF—in this case, in the mid-cap growth category. The ARK Innovation ETF (ARKK) gained big last year with return of 67.8% after miserable losses of 67.0% and 23.4% in 2022 and 2021, respectively.

Both ETFs from the ARK family are actively managed, while most of the 50 best performers track indexes. However, investors should keep in mind that ETFs that track certain indexes can have substantial risk. For example, the iShares Semiconductor ETF (SOXX) gained 66.9%. But with a total risk index of 2.20, this technology sector ETF is almost twice as risky as a broad-based equity ETF that tracks the S&P 500 index.

China Plus Clean and Green Dominate Worst-Performing ETFs

ETFs investing in Chinese stocks as well as ETFs targeting “clean and green” companies were among 2023’s worst-performing ETFs. These trends can be observed with a quick glance at Table 2.

The iShares MSCI China Small-Cap ETF (ECNS) dropped 23.3% in 2023 after falling by 24.8% in 2022. Fifteen China Region ETFs are included in Table 2.

The Invesco Solar ETF (TAN) dipped 26.8%, the worst 2023 performer of the many alternative energy and clean tech ETFs on the bottom ETFs list. The KraneShares MSCI China Clean Technology ETF (KGRN) straddles both categorizations, losing 14.8% in 2023.

The worst-performing ETF for 2023 was ProShares VIX Short-Term Futures ETF (VIXY), from the miscellaneous trading category. Interestingly, the top-performing ETF in 2022 is a member of the 2023 laggards: The iShares MSCI Turkey ETF (TUR) lost 9.2% in 2023 after gaining 106.4% in the prior year.

ETF Industry Dominance Continues for BlackRock and Vanguard

The largest ETF continues to be oldest: SPDR S&P 500 ETF Trust (SPY). The ETF had $497.0 billion in assets at the end of 2023, up from $356.7 billion at the end of 2022. The second-largest ETF, the iShares Core S&P 500 ETF (IVV), also saw its total assets increase as a result of the bull market: $399.6 billion at the end of 2023 versus $289.5 billion at the end of 2022. Both iShares Core S&P 500 and the third-largest ETF, the Vanguard S&P 500 ETF (VOO), have expense ratios of 0.03% versus 0.09% for SPDR S&P 500.

The ongoing dominant market share controlled by BlackRock’s iShares and Vanguard can be observed in Table 3. Thirty-seven of the 50 largest ETFs on the list are either iShares or Vanguard funds.

About This Year’s Guide

This year’s ETF guide makes use of the data and tools available to members on AAII.com. They include our ETF grades and category averages. Data on more than 3,300 U.S.-traded ETFs is updated monthly and is available to all AAII members. The print and PDF versions of this guide provide data on 393 ETFs of broad interest to U.S. investors. Key data on individual ETFs covering a broad range of asset classes, fund groups and categories is provided. Among the information you will find are calendar-year and annualized returns (based on net asset value), 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 is about average (the 41st to 60th percentile) compared to its category peers.

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 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 by clicking on the Excel button.

All AAII members can also track ETFs they own or are most interested in with My Portfolio. Clicking on an ETF’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 ETF 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 is the ETF groups matching the AAII 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).

Size

All ETFs are generally required to have at least $1.5 billion in assets. This is up from the $1.2 billion requirement used last year. 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 is 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 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/etfs/guide, where data on more than 3,300 exchange-traded funds can be found.

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

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