An Exchange Traded Fund (ETF) is a basket of stocks that usually tracks a specific index, industry or theme. ETFs can act as a great way to ensure diversification, without needing to buy and sell individual stocks. According to a study by S&P Global, 87% of active fund managers have underperformed the market over the past 15 years. Therefore, market-based index funds are seen as a great way to achieve sustainable returns as they reduce the risks associated with indivudual stock-picking.
However, just because risk is typically lower with diversification doesn't mean all ETFs are created equal. They're still subject to Mr. Market's mood swings as well. Some industries tend to be cyclical, and today’s losers can often become tomorrow’s winners. Let's take a look at some of the best and worst-performing ETFs of 2022 and their outlooks going forward.
iShares MSCI Turkey ETF
The best-performing ETF of the past 12 months and of 2022 was the iShares MSCI Turkey ETF (TUR, Financial). This ETF tracks the MSCI Turkey IMI 25/50 Index. It is composed of ~61 large, mid and small-cap stocks and thus it is a total market index. Its full-year return for 2022 was an incredible 106%, with a 54% return over the past 12 months (up to April 2023).
- Fiscal 2022 return: 106%
- Expense ratio: 0.57%
- Assets under management: $345.80 million
This ETF charges an expense ratio of 0.57%, which is more expensive than the S&P 500 ETF Trust (SPY, Financial), which charges just 0.09%. However, this extra expense is expected for an emerging market ETF, and for previous investors, it was well covered with an incredible return.
Turkey was considered in 2021 to be “not investible” by many institutional investors and even brokerages. I personally was trying to purchase a few value stocks in Turkey, but multiple brokers didn’t allow this. Two of those stocks have since increased by over 400%. Either way, this shows that being a “contrarian” investor can be a solid strategy, but it takes a strong stomach. The rewards in emerging markets have high potential, but so do the risks.
In the U.S., the central bank was concerned about a 6% to 8% inflation rate, which caused the Fed to hike interest rates. However, Turkey’s inflation rate was a staggering 84% in 2022 and continued to gallop on at “just” 54% in the first quarter of 2023.
Turkey has historically had a high inflation rate, but this was exacerbated by its central bank lowering rates, which caused a surge in the stock market. As the Turkish lira currency devalued, many consumers resorted to the stock market to protect their assets, which further drove up prices.
The largest sectors in the iShares MSCI Turkey ETF include finance, which makes up 18.69%, and energy, which makes up 11.39%. Its top three holdings are BIM Birlesik Magazalar A.S. (IST:BIMAS, Financial), a discount retail store company that makes up 6.36%, Petrol Rafinerileri (IST:TUPRS, Financial)(6.13%), which benefitted from rising oil prices, and Turk Hava Yollari AO (IST:THYAO, Financial)(5.88%), known as Turkish Airlines in the U.S.
There is a general election in mid-May 2023, and this could impact the future government and economic policy for the country.
Simplify Interest Rate Hedge ETF
The second-best performing ETF of the last year was the Simplify Interest Rate Hedge ETF (PFIX, Financial). This ETF returned a staggering 95% gain for the full year of 2022.
This should be no surprise given the fund benefits from an increase in interest rates, which we have seen substantially over the past year. Investors with foresight would have recognised that the high inflation numbers first reported in 2021 would have likely result in the Fed raising interest rates. In fact, Bill Ackman (Trades, Portfolio) of Pershing Square purchased an interest rate hedge that enabled him to turn $27 million into a staggering $2.7 billion.
The beauty of the Simplify Interest Rate Hedge ETF is it enables a similar strategy to be utilized by a less advanced investor. The fund holds a substantial position in interest rate options, which are purchased over the counter (OTC). Its functionality is similar to holding put options on 20-year U.S. Treasury bonds.
- Fiscal 2022 return: 95%
- Expense ratio: 0.50%
VanEck Crypto & Blockchain Innovators ETF
The worst-performing ETF of 2022 was the VanEck Crypto & Blockchain Innovators ETF (DAPP, Financial), which generated a -95% return for the year. This is an extremely concentrated ETF that consists of just 20 holdings across the cryptocurrency and blockchain sector. Its top four holdings are cryto minining companies Marathon Digital Holdings (MARA, Financial) and Riot Platforms (RIOT, Financial), computing company Northern Data Ag (NB2) and Microstrategy (MSTR, Financial), an analytics company that has invested heavily in crypto.
Really, the future of this ETF is similar to the future of the crypto economy. There are strong believers on both sides of the debate. Some investors believe crypto will become the global international currency, and offer citizens diversification from the volatile “money printing” ways of central banks, whereas other investors believe crypto is an over-hyped bubble that has been mainly used to facilitate gambling. I believe the truth likely is somewhere in the middle, but with a total expense ratio of 0.65%, this ETF is not exactly cheap relative to the others.
Global Online Retail ETF
The second worst-performing ETF was the Global Online Retail ETF (IBUY, Financial), which reported a -66% return in 2022. However, unlike cryptocurrency, I believe online retail has an extremely strong likelihood of bouncing back. This is because retail is a cyclical industry by nature, and online retail had a major boom during 2020. Therefore as economic conditions recover, I expect this sector to rebound.
Surprisingly, the top holdings don’t include the largest e-commerce player in the U.S., Amazon (AMZN), perhaps because Amazon is no longer just an online retailer. The fund's largest holding at 7.13% of its value is Global E Online (GLBE, Financial), which is an Isreal based software company that helps to enable international e-commerce for websites in a localized manner. The second largest stock in the fund is Allegro.EU SA (WAR:ALE, Financial), which is one of the largest e-commerce websites in Eastern Europe. This is followed by MercardoLibre (MELI, Financial), the largest e-commerce company in Latin America, which makes up 6.46% of the fund's value.
The expense ratio of this ETF is 0.69% which is fairly high relative to the other funds on this list.
Final thoughts
ETFs are a fantastic way to get exposure to a basket of stocks that cover specific sectors. I forecast the two best-performing ETFs from 2022 to produce average returns or underperform the market in 2023. However, I believe the worst performers could offer value potential. The crypto space is hard to predict as the future of this asset class is uncertain, but I do believe e-commerce should rebound soon, dependent upon economic conditions.
