As economic and geopolitical volatility weighs on stock markets globally, the Australian exchange traded fund (ETF) industry has been experiencing the storm with a negative start to 2022.

According to BetaShares Australian ETF Review for January, the industry fell 3.7% or $5.1 billion month-on-month and ended the month at $131.8 billion. Net asset flows remained positive at $1.5 billion.

Given the volatility, monthly ETF trading value rose by 26% hitting its second highest monthly level on record at $10.3 billion.

There are now 282 Exchange traded products on the ASX with Fat Prophets and Munro Partners introducing new active ETFs in January.

Betashares positive on ETF growth

A growing number of Australians putting their money into ETFs has been one of the biggest trends during the COVID-19 pandemic, increasing to ~1.73 million.

Inflation fears, forecasted rate hikes both in Australia and abroad along with threats of war between Ukraine and Russia have prompted a shaky start to 2022 with broad sell-offs across equity markets.

But BetaShares chief economist David Bassanese told Stockhead he still tips ETFs to grow this year with investors attracted to low cost, low risk products tracking the wider performance of a market or theme.

“Irrespective of what markets do the underlying flows into ETFs are likely to remain pretty strong,” he said.

Top performers

The top ETF in the past month was the BetaShares Global Energy Companies ETF (ASX:FUEL), up 13.6% in the period and ~41% in the past 12 months.

FUEL tracks the performance the largest global energy companies (ex-Australia) hedged into Australian dollars.

“A surge in oil prices is boosting the FUEL ETF,” Bassanese said.

“Obviously if there is a war between Ukraine and Russia you’re going to see a spike in oil prices which will favour energy companies.”

BetaShares U.S. Equities Strong Bear Hedge Fund  (ASX:BBUS) also rose 12.2% as the market took a downturn.

BBUS expects to generate a magnified positive return when the S&P 500 Total Return Index falls, and a magnified negative return when the index rises.

“Our bear fund has like a short position in the market so the value of that short position goes up when the market goes down,” Bassanese said.

Gold ETFs were also flavour of the month as investors took a more defensive approach and price of the precious metal rose with some of the biggest daily jumps in recent months. Gold is currently at ~US$1876 ounce.

“Global gold miners ETFs and the ones tracking the price of bullion has been popular for those wanting to invest in gold,” Bassanese said.

Food for thought

Another standout for the past month has been BetaShares Global Agriculture Companies ETF (ASX:FOOD), benefiting from a supply shortages globally.

“FOOD has done well which is broadly correlated with agriculture and food prices,” Bassanese said.

“The lift in food prices since COVID and with supply and weather disruptions have pushed up the price of agriculture which has helped the major companies in the FOOD ETF.”

Transition away from ‘blue sky tech’

There has been a move away from from ETFs focusing on high PE growth stocks to ETFs holding value companies with a below average PE ratio.

“Growth stocks have been outperforming value stocks for many years and even during COVID with technology stocks becoming defensive stocks due to working and shopping online,”  Bassanese said.

He said the pandemic gave growth stocks the extra impetus of performance with everyone jumping onboard but now there was an unwinding of that COVID premium plus potential lifts in interest rates, which tends to hurt growth stocks.

“Companies trading at high PE ratios with not a lot of earnings or what I call the ‘blue sky tech stocks’ are under pressure because of rising interest rates,” Bassanese said.

Laughing all the way to the bank

ETFs focusing on banks and the financial sector are coming back in favour, including BetaShares Global Banks ETF (ASX:BNKS), which is up 2.8% and 28% for the year.

Bassanese said the key thematic among ETFs at the moment is rotation from high growth tech stocks to unloved cheap value stocks.  There’s also been a move away from emerging markets.

“Financials tend to benefit from rising interest rates because it helps their profit margins so we’ve seen our global banks ETF BNKS do really well,” he said.

“Bond yields going higher is going to continue favouring financials and global banking stocks.”

The rotation towards value ETFs is expected for some time yet.

“I think that rotation broadly speaking has further to run until we see a levelling out of bond yields but I don’t think we’re there yet and they will go higher,” Bassanese said.