• Only 9 of the 269 Australian ETFs made double digit returns in FY22
  • Best performers those exposed to commodity prices, energy and broader resources
  • Experts say don’t write off bottom performers which may rally as market turns

In 2001, there were just two exchange traded funds (ETFs) on the ASX – both issued by State Street Global Advisors. As of June 30, 2022 the ASX and Cboe Australia was home to 269 ETFs with more regularly launched.

From diversified, following a broad index to thematics, focused on a portfolio of companies exposed to a chosen theme, ETFs have become a popular investing platform.

But in a year of volatility on global markets the performance of ETFs has been disappointing for many investors.

Of ETFs that had been launched for the full 12 months in FY22 only 34 made a gain, while there weren’t even 10 to make double digits. Of the 269 as at June 30, 2022 there were 31 which had not been launched for the full 12 months with no data for the full period available.

FY22 ETF Winners

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Best performers those exposed to commodities and resources

Stockspot is an online investment advisor which builds custom portfolios using ETFs. Founder and CEO Chris Brycki told Stockhead the best performing ETFs over the past year have been those exposed to commodity prices, energy, and broader resources.

“Inflationary pressures caused by loose monetary policy, the war in Ukraine and global supply chain issues have led to rising commodity prices such as oil, nickel and agricultural goods like wheat,” he said.

But he warned against just looking at one year returns with top performer BetaShares Crude Oil Index ETF-Currency Hedged (Synthetic) (ASX:OOO), which is up ~60% over the past year, a good example.

“Notwithstanding good one-year returns, this ETF has seen its price fall nearly 50% over the last five years,” he said.

“This is despite the price of oil rising over 100% in the same period.”

Brycki said the huge divergence in performance highlights the dangers of investing into synthetic ETFs like OOO that hold complex derivatives instead of the underlying investment.

“The ETFS Physical Gold ETF (ASX:GOLD) is another top performer this year and one we recommend to clients for its defensive qualities,” he said.

“It holds physical gold in a vault in London, whereas OOO is made up of financial derivatives and doesn’t hold any physical oil.”

FY22 ETF Losers

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Worst performers exposed to high growth equities

Brycki said the worst performing ETFs over the past year have been those exposed to niche technology themes, such as biotech, robotics, and cloud computing as well as ETFs tracking Asian markets and some leveraged ETFs.

Brycki is an outspoken critic of thematic ETFs saying the timing of when they are launched aligns perfectly with when the retail interest in that sector is at its peak.

“Rising interest rate expectations have put a downward pressure on the valuation of high growth shares which is why many niche sector thematic ETFs have suffered,” he said.

“This highlights the danger of investing in niche thematic ETFs and leveraged ETFs and is one reason we don’t recommend them to Stockspot clients.”

Bottom performers may rally

Author and Founder of Shareplicity at Shareplicity.com.au Danielle Ecuyer told Stockhead the FY22 ETF performance shows investors are defensively positioned in the marketplace now with economic concerns.

“But if you get any indication for example that inflation really is coming down in a more sustained fashion and you see a rally in the 10-year bonds where prices are going up and yields coming down, then those bottom 10 will start to move quite aggressively,” she said.

“It’s just money responding to the opposite of what it did when interest rates were rising.

“Does it mean a good return in the long-term, we can’t necessarily say – but there will be that kind of thing where risk-takers do bottom fishing in the most bombed out and interest rate sensitive sectors.”

Brycki’s advice – don’t crystal ball gaze

Brycki said even for professionals, there’s no way to predict what market sectors will perform best or worst over any time with any level of consistency.

“This year one of the most well-owned sectors – technology – has performed worst and one of the most out of favour sectors – oil – has performed best.”

He said this is one reason why ~85% of Australian fund managers have underperformed the index over 15 years.

“This is also why we prefer to own the broad index ETFs and give our clients an exposure to all market sectors,” he said.

“It’s the safest way to guarantee you own the winners that are driving the market return on any given year.”

Ecuyer’s advice – Watch bond markets

Ecuyer said as inflation gets under control and interest rates start to steady, some of the emerging markets, biotech and growth stocks may turn.

“As soon as the Fed starts to pivot and the US dollar weakens those emerging market ETFs will start to perform really strongly,” she said.

“In the underperformers sitting down there you want to go with quality and historical links in terms of what performs when the bond markets turn.

“In the interim things such as global health care, pharmaceuticals are good defensive sectors and why it may not fit some people’s ESG ratings there is probably going to be continued money into defense ETFs.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.