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High inflation, rising interest rates and the growing risk of a recession weighed heavily on the performance of exchange-traded funds in 2022 – a scenario experts believe will likely continue to play out into 2023.

“We’re likely going to see a dichotomy of looking for safety while seeking income,” says Danielle LeClair, director of manager research at Morningstar Canada in Toronto.

Here are five trends ETF experts predict will shape the ETF landscape in the New Year:

1. Hanging on to high-interest savings

High-interest savings funds saw the highest inflows among ETFs in Canada in 2022, with more than $7-billion flowing into the cash alternative ETFs as of Nov. 30, according to data from National Bank Financial Inc. CI’s High-Interest Savings ETF (CSAV-T) had the highest inflows at $2.4-billion, the data show, followed by Purpose High-Interest Savings ETF (PSA-T) at more than $1.6-billion.

“Investors just weren’t sure where to go, so many defaulted to these cash instruments,” Ms. LeClair says.

She says these ETFs, which offer a low but steady yield, are expected to remain popular in 2023 as interest rates remain high, and market volatility continues.

2. Fixed income makes a comeback

Demand for high-interest savings drove inflows for fixed-income ETFs, which include bonds and cash alternatives, to near record heights so far in 2022, reaching about $13-billion as of Nov. 30, according to Tiffany Zhang, ETF analyst at National Bank Financial.

As the year progressed, however, traditional broad-based aggregate bond ETFs drew more attention, accounting for inflows of more than $6-billion. Bond fund values fell early in 2022, Ms. Zhang notes, as interest rates rose rapidly, but investors increasingly sought broad-based bond ETFs in late fall as yields improved along with a widespread view the steepest rate hikes were done. Growing demand in the latter half of the year helped propel fixed income to its second best year in Canadian ETF history, Ms. Zhang says, behind 2019 when it saw $14-billion of inflows.

Among the funds drawing investor capital was Vanguard’s Canadian Aggregate Bond Index ETF (VAB-T). It garnered $420-million of inflows in November, National Bank data show.

Investors are likely to allocate more to bond ETFs in 2023, with yields double what they were at the start of 2022 and interest rate hikes expected to plateau, Ms. Zhang says.

3. Different options for income ETFs

Equity ETFs offering income from dividends and options strategies, like writing covered calls, are likely to see more interest as investors “continue to reach for what works,” says Lara Crigger, New Orleans-based editor-in-chief of the ETF data firm VettaFi.

She points to U.S.-listed funds like JPMorgan’s Equity Premium Income ETF (JEPI-A), yielding 10 per cent annually, which has seen about US$12-billion of inflows in 2022.

Income equity ETFs involving options to generate yield were popular in Canada, attracting $4-billion of inflows in 2022, the highest ever, according to Ms. Zhang.

ETFs like BMO’s Canadian High Dividend Covered Call ETF (ZWC-T), yielding about 6 per cent, could see demand in 2023 as “investors search for yield from less traditional strategies,” adds Ms. LeClair.

4. Commodities continue to attract

Commodity-based ETFs, including energy, base and precious metals, and agriculture products, could see renewed attention, building on generally strong performance in 2022.

National Bank data show energy ETFs led ETFs across all sectors in Canada for performance. Horizons Natural Gas ETF (HUN-T), up nearly 72 per cent, topped the list, trailed by CI’s Energy Giants Covered Call ETF (NXF-B-T), up 52 per cent, as of Dec. 12. Both are total returns.

Ms. Crigger adds agriculture commodities in particular drew more attention in 2022 amid Russia’s invasion of Ukraine, two countries that are major producers of commodities such as wheat, corn and fertilizer.

“It seemed everybody was an armchair grain commodity analyst,” she says, with ETFs like Invesco DB Agriculture (DBA-A) seeing inflows of hundreds of millions of dollars in the spring.

Interest in most commodities waned later in the year, with most ETFs experiencing net outflows in recent months, she adds.

Commodity ETFs could see regained attention in 2023 as the war in Ukraine continues, affecting supply. Still, Ms. Crigger says some commodities could also come under pressure amid the economic slowdown many are forecasting.

“I don’t think you can crystal ball what will happen because so much depends on things that haven’t happened yet, like weather,” she says.

Still, if volatility persists, investors may find windows of opportunity for commodity ETFs, Ms. Crigger notes.

5. More actively managed growth strategies

More actively managed ETFs are expected to come to market in 2023, adding to the growing trend in 2022 and previous years. More asset management companies have made a “shift toward ETFs amid falling demand for mutual funds,” Ms. Crigger notes.

2022 has been a tough year for mutual funds in Canada, with net outflows of $30-billion as of Nov. 30, according to National Bank data, while ETF inflows are likely to exceed $30-billion by year’s end – making it the third-best year on record behind 2021 ($52-billion) and 2020 ($40-billion), according to Ms. Zhang.

The past year saw a handful of new and notable actively managed, growth-oriented ETFs list in Canada, including BMO’s ARK series, launching in November, offering choices like the BMO ARK Next Generation Internet Fund ETF (ARKW-T). The ETFs mirror U.S.-listed funds from ARK Investment Management LLC., led by renowned active manager Cathie Wood.

Demand for ARK ETFs soared in 2020 as investors favoured growth themes like fintech and robotics, but in 2022, these funds dramatically underperformed as more investors sought safety amid rising rates.

Additionally, Canadian investors will likely see a very different spin on growth ETFs, passive or active: single-stock ETFs.

Purpose Investments filed a preliminary prospectus in November for 10 funds, each holding a single stock, like Tesla (TSLA-Q), Ms. Zhang says, noting the ETFs employ active leverage and options strategies to boost returns.

Although these growth-oriented launches may seem ill-timed, “there is still a large investor base for them,” Ms. LeClair notes.

Of course, just like other trends for 2023, investors can end up chasing past returns leading to losses in the future, she cautions.

“That is always a risk, especially for new launches.”

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