Hot ETFs in 2023

As we near the end of 2023, we take a look at what has happened to exchange-traded funds (ETFs) over the year. 

Importantly, the data clearly shows that U.S. ETFs aren’t all about U.S. stocks. In fact, a significant amount of flows and trading are in ETFs with exposure to international stocks, bonds and even commodities. 

Our data even shows that very little of the trading in ETFs that track U.S. stocks results in creations and redemptions (net flows) each day. And yet, spreads are incredibly tight, allowing all kinds of investors to cheaply invest or hedge their portfolios. 

Finally, we look at popular ETF tickers in 2023 and find that investors used ETFs to respond to a lot of significant macro and news events that we saw this year.  

Looking at 2023 returns through an ETF lens 

With over 3,000 ETFs listed in the U.S., you can buy a wide variety of exposures across multiple countries and asset classes in a single trade.  

Using a selection of popular ETFs, we show the price returns so far in 2023 below.  

We see that the Nasdaq-100 leads other U.S. equity indices (blue bars) with a 45% return through Dec. 4. That’s thanks to the returns in communications and tech stocks – which also drove strong returns in those sector ETFs. 

In contrast, Commodities (orange) and bonds (green) mostly fell as interest rates rose and the global economy slowed. 

Chart 1: Year-to-date returns by asset class 

More than 50% of ETF Inflows have nothing to do with U.S. stocks 

During 2023, we saw another year of net ETF inflows. Adding up all the net creations (creations minus redemptions), we estimate investors have added over $475 billion to ETFs year to date. That’s the equivalent of buying around $2 billion across all ETFs each day. Industrywide total assets now add to $7 trillion. 

However, around 50% of net inflows going into U.S. ETFs have nothing to do with U.S. stocks.  

Instead, we see a significant amount of ETF buying into fixed income ETFs. Alone, those bond ETFs saw over $175 billion in net flows (green area), representing almost 40% of all net inflows. 

In addition, international equity ETFs also saw over $75 billion in net creations (dark blue area). 

However, commodity ETFs (as an asset class) and all others saw small outflows. 

The remainder of ETF flows went into ETFs that hold U.S. stocks, adding to almost $250 billion (blue area). To be fair, ETFs (especially index ETFs) now represent a material net investor for many U.S. companies. 

Chart 2: ETP net creations and redemptions 

ETF creations are still just a fraction of market liquidity 

Although $2 billion of net inflows each day sounds like a lot, ETFs have far more liquidity than that, and generally, the underlying markets, which are arbitraged for creations, are even more liquid again. So, all that buying doesn’t materially impact stocks. 

For example, each day, U.S. ETF trading adds to around $151 billion (each side), or 30%, of total stock market liquidity.   

In addition, not all trades in U.S. ETFs affect U.S. stocks. In fact, over 30% of U.S. ETF trading is in ETFs that hold no U.S. stocks but rather: 

• International stocks ($21 billion, or 14%),  
• Bonds ($24 billion, or 16%) and even  
• Commodities ($3 billion, or 2%). 

As the chart below shows, ETF inflows and outflows remain a fraction of the liquidity in the ETF and an even smaller fraction of liquidity in underlying markets. 

Chart 3: Average daily value traded by asset class 

Who trades ETFs? 

As we’ve seen before, tight spreads on ETFs, combined with the ability to trade hundreds of stocks (or bonds) in a single click, make them a very cost-effective way to hedge or execute thematic trades. 

But who trades ETFs? 

• Institutional Investors: The buy side manages most ETF portfolios; however, based on 13F holding records of ETFs, mutual funds are not significant holders of ETFs, though they may still utilize ETFs for liquidity or asset allocation decisions.  
• Retail: We have previously estimated that around one-third of all retail trading is in ETFs. However, that adds to just $10 billion each day, which is just a fraction (3%) of the more than $300 billion in total buying and selling each day. 
• Banks, hedge funds and market makers: That seems to indicate that the majority of ETF trading likely comes from other sophisticated investors and traders, such as hedge funds, banks and market makers, all of whom keep markets efficient in different ways. 

Smart investors use ETFs to trade on important macro news 

What that means is that ETF trading is often done by experts with good knowledge of important events driving the economy and stocks. 

We can see that’s true by looking at ETFs that were popular this year (table below) and marrying those with important economic drivers in 2023. 

Chart 4: Most popular ETFs in 2023* 

*In the table above, we rank all non-levered ETFs by a score that reflects the strongest blend of trading (ADVT), flows (Net AUM is net creations) and returns. This allows smaller ETFs with good returns or high trading activity to compete with larger funds we often talk about. We also show a selection of ETFs from outside the top 10 as that reduces duplication of trends and highlights some interesting thematic trades.

As we saw above (Chart 1), 2023 was characterized by much higher interest rates, driven by central bank efforts to tackle inflation. Some of that inflation was energy inflation, exacerbated by the Ukraine war in 2022, which changed supply chains and increased the costs of oil and (especially) natural gas in Europe. 

Not surprisingly, we see that in the table above. Natural Gas (UNG) saw net inflows, and ultimately, its price declined as supply chains and storage concerns were resolved over the summer of 2023. Other commodities also fell as higher rates and reduced covid savings slowed activity globally, affecting agricultural commodities (-15%) and industrial metals (-5%). Although after all this inflation, gold recently hit a record high (+11%). 

And who can forget the (thankfully short) unexpected challenge that higher interest rates caused for regional banks in 2023? Rising rates drove losses in bank bond portfolios, causing solvency issues that pushed some well-known U.S. regional banks into insolvency and put billions of dollars of depositor funds at risk back in March. The regional bank ETF (KRE) held some of those banks and remained an effective way to trade the valuations for the banks that were rescued or survived. It remains down over 20%, as a sign that the crisis still hurts the valuations of regional banks. 

One surprise from high rates has been the cooling of supply in the property market – despite high property prices. It seems many homeowners locked in low mortgage rates during Covid’s “zero interest rate” period but now can’t afford to move as that would require refinancing to mortgage rates more than 300% higher. That has, in turn, benefitted Homebuilders ETFs (XHB) as more buyers have been forced into the new home (or old home improvement) market. 

Perhaps an even bigger surprise, given the valuation headwind that high rates usually cause, especially for growth stocks, was the performance of large-cap growth stocks (QQQM, VUG, IWF and SCHG) in 2023, while other indexes lagged (Dow Jones Industrial Average +9%, Mid-Cap +10% and Small-Cap +7%, Chart 1). However, a lot of that growth was driven by an earnings recovery in tech stocks, along with exposure to artificial Intelligence (AI). The so-called Magnificent 7 (Apple, Amazon, Alphabet, NVidia, Meta, Microsoft, and Tesla) are all expected to profit from AI development. That’s helped the Nasdaq-100 (QQQ) and cloud computing (SKYY), as well as trades into chips (SMH), tech (XLK), and AI (BOTZ) ETFs. 

Looking further down the list, we see some other interesting investor trends.

Hottest new ETFs 

This year, we have also seen a record number of new ETFs, with over 475 listed. 

In the table below, we look at the most successful new ETFs, defined as ETFs that launched in 2023 and gained the most assets year-to-date. 

Chart 5: Most successful new ETFs (by current AUM) 

All but one of the successful ETFs have positive returns. Again, there are some interesting trends that might show what makes a new ETF different and successful: 

• Actively managed ETFs: The SEC loosened rules on listing on-transparent ETFs a few years ago, and now, 75% of the ETFs that launched this year are actively managed, and their AUM has risen over 500% in the last five years. Importantly (for those on the buy-side), this has been partly fueled by mutual fund conversions to ETFs, with 60 so far. 
• Bonds as interest income rises: Perhaps not surprisingly, with real interest rates returning to positive levels, bonds are attractive investments again, and bond ETFs take six of the top 15 spots. 
• Climate-focused ETFs took two spots despite ESG mutual funds seeing $14 billion in outflows this year (also see outflows for ESGU in Chart 5). 

• Smaller stocks: And in a year that’s been dominated by the “Magnificent 7,” there was still demand for ETFs focused on small-cap (two) and mid-cap stocks (one). Data suggests small- and mid-cap stock valuations are well below average, making them a potentially attractive investment. 
• International stocks-focused ETFs were popular, too, including one ex U.S. (GXUS) and one EM (BBEM). These types of ETFs can be an easy way for investors looking to diversify their portfolios. 

ETFs have had another successful year 

Overall, ETFs have had yet another year of growth. The low costs to trade and instant diversification make them an investment tool that retail investors and hedge funds love to use. 

Looking at the ETFs that gained (or traded) the most this year highlights a number of important events that drove the economy in 2023, especially impacts from higher interest rates, AI and a slowing global economy.  

One important takeaway from all this is that active trading in ETFs is far more sophisticated and diversified than you might think. 

Michael Normyle, U.S. Economist at Nasdaq, contributed to this article. 

^{The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.}