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3 Top ETF Trends for 2022

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What You Need to Know

  • ETF and market experts Josh Brown, Dave Nadig, Eric Balchunas and Liz Young offer their outlooks.
  • 2022 could be the year large-cap value makes a comeback like small-cap value did in 2021.
  • It could also be host to crazier and wilder ETF products, Bloomberg's Balchunas says.

Ask just about any market strategist what’s in store for 2022, and there’s one word that keeps cropping up: “interesting.”

‘It will be an interesting year no matter what happens,” said Josh Brown, CEO of Ritholtz Wealth Management and renowned markets blogger, at a recent webinar on ETFs in 2022 sponsored by ETF Trends and Investopedia.

The setup for the coming year in markets is full of potential catalysts for market reactions: rising inflation, a central bank on the cusp of reversing years of accommodative monetary policy with rate increases, and stock valuations near historic levels.

In addition, there’s growing interest in investments focused on corporate responsibility to address climate change, social inequality and good governance, and in cryptocurrencies and related investment products.

Against that backdrop, Brown and several other ETF experts weighed in on their expectations for 2022 along with recommendations for ETFs in the webinar. Here are three of their top themes for 2022.

Value vs. Growth

In 2021, small-cap growth stocks gained only 2%, while small-cap value stocks soared 28%, but large-cap stocks did not experience that pattern, Brown said.

In 2022, it’s possible that large-cap value outperforms large-cap growth, according to Brown, who added that the large-cap value index is less concentrated, with a lot more sectors in leadership than large-cap growth.

“I wouldn’t be shocked if there was this huge rotation that continues,” Brown said.

Technology & Beyond

Tech stocks will continue to dominate in the U.S. stock market, but high-multiple tech stocks will be under pressure, said Liz Young, head of investment strategy at SoFi. She recommended that investors not bet against technology but be choosy about tech stocks, separating the top-heavy names from the rest of the sector.

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“Pay attention to valuations,” Young said. “If you’re overweight [on] tech, learn about the merits of other sectors. Look at health care and financials. A lot of other sectors did well last year, and that trend is likely to continue.”

Her evidence: a mere 1-percentage-point difference in the performance of the equal-weighted S&P 500 index and the traditional market cap-weighted S&P 500, with the equal-weighted index outperforming 27.48% to 26.89%.

Expect More, Crazier ETF Products

In 2021, $900 billion flowed into ETFs in the U.S., two-thirds of that into equities; hundreds of new ETFs launched — four times the number of ETF closings, said Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database.

He expects the ETF explosion will continue because ETFs are “a powerful wrapper for investors trying to get any type of investment exposure.”

“ETFs are the lake where all the fish are biting, so if you’re an asset manager, you kind of have to fish there whether you like it or not,” said Eric Balchunas, senior ETF analyst and funds product specialist at Bloomberg Intelligence.

He expects “crazier and more wild products” because “cheap beta” available through asset managers such as Vanguard has taken over investors’ core portfolios, leaving investors looking for “something completely and dramatically different to put on top of that.

“Get ready for more and wacky ETFs themes and ETFs that use derivatives to sculpt desired outcomes,” Balchunas said.

His top picks for some of those ETFs are:

  • BITS: Global X Blockchain & Bitcoin Strategy ETF. Half blockchain and half Bitcoin futures.
  • COPX: Global X Copper Miners ETF. A risk-on inflation-hedge investment, said Balchunas.
  • CTRU: Ark Transparency ETF. Ark’s version of ESG, “mostly G,” said Balchunas, with 100 stocks equally weighted. “Cathie Wood sells hot sauce. This is her ESG flavor.”
  • AVDV: Avantis International Small Cap Value. Invests in one of the most “beat-up bargain bins” of the investment world.
  • FRDM: Freedom 100 Emerging Markets ETF. Excludes stocks in corrupt countries such as China and Russia. “People are becoming more aware that ESG can also mean countries, not just companies,” Balchunas said.

Pictured: Ritholtz Wealth Management CEO Josh Brown