Exchange-traded funds (ETFs) were big beneficiaries of investor dollars in 2022. Flows—the difference between dollars invested and dollars taken out—totaled $597.9 billion in 2022 according to Morningstar. This was the second-largest amount ETFs have seen in their existence. Still, it was 33% less than $901.7 billion in flows that ETFs realized in 2021.

These inflows occurred despite the large number of ETFs that fell in value last year. Within the equity asset class categories included in the print version of this guide, only the two energy sector categories realized gains in 2022. On the fixed-income side, only ultrashort bonds posted gains. In total, nearly 90% of all ETFs with full-year returns fell in value last year.

Keep this number in mind as you look at the returns. It is unusual to see both equities and fixed income post negative returns for the same calendar year. When both fall at the same time, it is difficult for both passive and active strategies to do well.

Despite the rough market conditions, three big trends continue to aid ETFs. The first is the ongoing shift toward passively managed investments. The majority of ETFs, and particularly the largest ETFs, continue to track indexes. The second is the use of ETFs by financial advisers, asset allocators and tactical portfolio managers. ETFs provide targeted exposure at low expense in a vehicle that can easily be traded, thereby lessening the need to handpick individual securities. The third trend is the comparative tax-efficiency of ETFs relative to mutual funds.

We continue to see the preference for tax-efficiency play out in the number of actively managed exchange-traded funds. There were 1,053 ETFs not designated as index ETFs by Morningstar at the end of last year. This is more than double the 501 that existed at the end of 2020. The median tax-cost ratio for actively managed ETFs in existence long enough to calculate it is 0.8%.

These funds tend to be neither large nor cheap as a group. The median actively managed ETF had $40 million in total assets and charged an expense ratio of 0.70%. (Just 61 actively managed ETFs had at least $1 billion in total assets.) Approximately 11,000 shares of the median actively managed ETF traded on the average day.

Whether the majority of actively managed funds gain enough interest over time to remain viable from a business standpoint remains to be seen. Judging by the current asset and trading volume numbers, most actively managed ETFs have yet to move beyond the early adapters.

Energy-Related ETFs Were the Big Winners in 2022

The 50 best-performing exchange-traded funds are presented in Table 1. All but nine of these ETFs are from either energy, commodity or natural resources categories. The dominance of energy-related ETFs reflects the strong tailwind that high oil and natural gas prices provided to related stock and futures contract prices.

VanEck Oil Services ETF (OIH) benefited the most among these ETFs last year, with a 66.3% gain. The fund invests in companies providing services to upstream oil companies. Upstream companies engage in activities such as drilling for oil.

However, investors would be wise to take note of VanEck Oil Services’ total risk index of 3.64—one of the highest on the list. While the fund shone in 2021 and 2022, its three- and five-year grades are F. (Grades of F are assigned when an ETF ranks in the worst 20% for its category.) The ETF lost 44.9% in 2018 and was down 41.3% in 2020. Such volatility is indicative of a boom-or-bust type of fund.

A similar level of volatility can be seen in the iShares US Oil Equipment & Service ETF (IEZ). This fund led most of its peers in 2022 but has F grades for its three- and five-year returns.

The best-performing ETF last year was not from an energy or commodity category, but rather the iShares MSCI Turkey ETF (TUR). As the name implies, this fund provides exposure to Turkish stocks.

Country-specific stocks provide unique risks, especially those targeting comparatively smaller economies. Turkey has experienced very high rates of inflation. Nonetheless, its stock market rallied last year in response to a series of interest rate cuts by the Turkish central bank.

A Bursting of Bubbles Among the Worst-Performing ETFs

Bitcoin, marijuana and disruptive technology are among the big commonalities of 2022’s worst-performing ETFs. These trends can be observed with a quick glance at Table 2. The presence on this list of many funds targeting these three themes reflects the bursting of meme-related investing bubbles.

Global X Blockchain ETF (BKCH) and Bitwise Crypto Industry Innovators ETF (BITQ) imploded by 85.2% and 83.8%, respectively, last year. Both funds invest in companies tied to cryptocurrency.

Both Global X Blockchain and Bitwise Crypto Industry launched in 2021. Niche ETFs launched specifically to target areas of speculation tend to burn out fast or change names and strategies very quickly.

The ARK ETF Trust family is notable for having five funds on the bottom ETF list. These funds’ 2022 losses range from 46.7% for the ARK Autonomous Tech & Robotics ETF (ARKQ) to a loss of 67.5% for ARK Next Generation Internet ETF (ARKW). ARK is known for targeting companies that its founder, Catherine Wood, believes are innovative and disruptive.

The worst-performing fund is VanEck Russia ETF (RSX). This ETF stopped trading in March 2022 following Russia’s invasion of Ukraine and the global sanctions imposed on Russia in response. The ETF was liquidated in January 2023. Though an extreme example, it demonstrates the political risk of investing in single-country ETFs.

BlackRock and Vanguard Still Dominate the ETF Industry

The largest ETF continues to be oldest: SPDR S&P 500 ETF Trust (SPDR). The fund had $356.7 billion in assets at the end of 2022. This amount is down from $455.2 billion at the end of 2021. The second-largest ETF, iShares Core S&P 500 ETF (IVV), also saw its assets drop as a result of the bear market: $289.5 billion at the end of 2022 versus $334.7 billion at the end of 2021. Both the iShares Core S&P 500 and the third-largest ETF, 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-eight 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 3,100 U.S. ETFs is updated monthly and is available to all AAII members. The print and PDF versions of this guide provide data on approximately 380 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 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 was 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 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 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) to provide a more direct comparison with our quarterly ETF updates, which are included in the May, August and November issues of the AAII Journal.

Size

All ETFs are generally required to have at least $1.2 billion in assets. This is up from the $1.0 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 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 3,100 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. 

Related

ETFs and Mutual Funds

Tips for Choosing the Right Funds for Your Needs

Related

Exchange-Traded Funds

Choosing Best-in-Class ETFs

Related

Exchange-Traded Funds

Do the Top ETFs Continue to Outperform?