With just a month left in 2022, it’s fair to say this will go down as a forgettable year for growth equities and the related exchange traded funds.
After propelling the market higher for more than a decade, growth stocks fell on hard times this year due in large part to high inflation that forced the Federal Reserve to raise interest six times. Higher interest rates diminish the appeal of the longer-ranging cash flows of growth companies.
Additionally, some growth stocks, particularly those in small-cap territory, aren’t yet profitable and markets are showing that is not a favorable trait in this environment. Fortunately, there are reasons to believe the current scenarios plaguing growth stocks and ETFs could actually work in favor of these assets in 2023.
“Despite its sharp inflation, the ‘70s enjoyed the second-largest improvement in corporate profits. Meanwhile, the 2010s experienced both the lowest inflation and the second-weakest profit growth,” notes Morningstar’s John Rekenthaler. “(If you are speculating that the 2010s sputtered because the arrival of COVID-19 ruined the final year’s totals, well considered. However, that hypothesis fails, as I concluded that decade in December 2019.) In fact, those findings imply that inflation improves profits.”
With those factors in mind, here are some industry-specific growth ETFs that could be worth considering as 2023 nears.
WisdomTree Cloud Computing Fund (WCLD)
Software stocks of all stripes are being taken to task and that includes once beloved cloud computing fare, explaining the struggles of the WisdomTree Cloud Computing Fund (WCLD). On the other side of the equation, WCLD, which tracks the BVP Nasdaq Emerging Cloud Index (EMCLD), may be offering an unusual amount of value at the moment.
That is to say some market observers are apt to argue that the forgettable performances delivered by cloud stocks this year belie solid fundamentals and attractive multiples.
“The average EMCLOUD company is now trading at ~4.8x EV/NTM revenue,” notes Bessemer Venture Partners, WCLD’s index provider. “This is below the 10-year average (trailing) and the 5-year average (trailing), as well as the 5-year average (Nov ’12–Oct ’17).”
Global X Cybersecurity ETF (BUG)
Cybersecurity is arguably the epitome of a growth industry that’s gotten caught up in the broader growth equity downturn this year while still maintaining impressive fundamentals. The Global X Cybersecurity ETF (BUG) is down almost 28% year-to-date, perhaps indicating cybersecurity stocks are babies being thrown out with the bathwater.
In fact, cybersecurity fundamentals, including long-term spending projections, remain as strong as ever. After all, cyber criminals don’t cease attacks and hacks simply because the economy is slowing. If anything, that motivates cyber criminals.
“We appear to be in the middle of a broad digital transformation where enterprise data and applications are moving to the cloud,” according to Global X research. “Securing this shift of data assets is a priority area of investment. Fourth, the operational technology running critical infrastructure such as pipelines, dams, electric grids, and the industrial control systems running supply chains and production facilities are being digitized. Securing these nodes presents challenges for governments around the world.”
KraneShares Global Carbon Transformation ETF (KGHG)
The KraneShares Global Carbon Transformation ETF (KGHG) is an actively managed ETF that debuted earlier this year. While it’s not a dedicated growth ETF in the traditional sense, the fund is home to shares of companies leading the global decarbonization transition, many of which are growth firms.
With global energy demand poised to soar over the next several decades and efforts to reduce dependence on fossil fuels, KGHG could be at the right place at the right time.
“Decarbonizing industry will not be easy, especially among four sectors that contribute 45 percent of its carbon dioxide emissions: cement, steel, ammonia, and ethylene,” according to a McKinsey report. “The process demands reimagining production processes from scratch and redesigning existing sites with costly rebuilds or retrofits. Furthermore, companies that adopt low-carbon production processes will see a short- to mid-term increase in cost, ultimately placing them at an economic disadvantage in a competitive global commodities market.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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