Think twice before buying the top 10 ETFs of 2022: ‘It doesn’t work that way in investing’
Last year was a brutal one for investors. The S&P 500 gave up more than 18% in 2022, and the broad bond market surrendered 13%.
But over short periods, there’s a good chance at least one exchange-traded fund is still performing well. ETFs are baskets of stocks that track the performance of a market index but trade inexpensively on an exchange like a stock, making them popular choice among retail investors.
While many ETFs are designed to track broad market indexes, more niche funds offer investors exposure to virtually any slice of the market, and one is bound to be working. But what works in one year may not work in the next, or over the long term.
“If we look at the top of the NFL standings, we can have a pretty good idea that those are the best teams,” says Russ Kinnel, director of manager research at Morningstar. “It doesn’t work that way in investing. There’s much more luck and randomness involved.”
You don’t have to look very hard at the list of the top-performing ETFs to get a sense of what worked in an otherwise bleak 2022.
The top performing ETFs in 2022: a fund tracking stocks in Turkey, one designed to hedge against hikes to interest rates and a selection of ETFs that invest in the energy sector. (Notably, this list excludes leveraged and inverse ETFs, which are generally considered tools of options traders unsuitable for long-term investors.)
While this list is helpful to understand what went on in 2022, it isn’t necessarily an indication of how any of these funds will perform in the future.
Why these ETFs stood out in 2022
It doesn’t get much more random than investing in an index of Turkish stocks — for the average U.S.-based investor, at least. But in a year when stocks sank the world over, that index returned 106%.
After a grisly 2021, Turkish shares turned things around in 2022, thanks largely to the country’s central bank slashing interest rates during a period when everyone else was raising them. With inflation through the roof (it hit 85.5% in Turkey at one point this year) and the value of the lira eroding, Turks turned to the stock market in the hopes of protecting their cash from rising prices.
The majority of the rest of the list reflects a gangbusters year for the energy sector. The Russian invasion of Ukraine contributed to a spike in oil and natural gas prices as the U.S. and European Union sought to crimp Russian energy exports.
As a result, oil and natural gas firms in the S&P 500 delivered an average return of more than 59% in 2022. None of the other 10 sectors managed a positive return.
How to invest in ETFs in 2023
It can be tempting to buy last year’s winners in the hopes that they can continue an upward run. But be careful, investing experts say. The trends that drive stock prices one way or another can change quickly.
In hindsight, some of the drivers behind these ETFs’ success may seem obvious. “Predicting sector performance can look deceptively easy,” says Kinnel. “You can say it was obvious that energy would be good. But look at performance in individual years, and you’ll see it’s actually really hard.”
It’s difficult to predict how any investment or group of investments will behave in the near term. While knowing how an investment has performed recently can be a data point in your larger analysis, it should never be the sole reason you buy, says Todd Rosenbluth, head of research at ETF research firm VettaFi.
“The adage that past performance isn’t a predictor of future results is likely going to be just as relevant in 2023 as it was throughout the history of investing,” he says. “The market environment this year is going to be different.”
Rather than asking, “What have you done for me lately?” step back and look at any prospective fund’s long-term performance. By looking at a fund’s last several calendar years, you can get a sense of how it performs year in and year out in different types of markets, both in absolute terms and relative to peer funds.
“A single-year performance is information, not a verdict,” says Kinnel.
More important, consider the specific role any fund might play in your long-term investing plans. While it may seem attractive to bet on the next slice of the market to take off, you’d be wise to avoid devoting major space in your portfolio niche funds, which can be volatile and unpredictable, experts say.
Funds that track stock market sectors may seem like an intuitive way to invest in the market, but don’t invest unless you already have a broad-based core portfolio, says Rosenbluth.
“These should be complementing your strategy rather than being your broader strategy,” he says.
Sign up now: Get smarter about your money and career with our weekly newsletter
Don’t miss: Now is an ‘ideal’ time for young people to start building wealth, says investing expert
Ozzy Osbourne to headline first show this fall since announcing retirement
Crowds gather in Washington Square Park to celebrate Transgender Day of Visibility
Members of exiled Chinese church detained in Thailand
Clark, Iowa end perfect South Carolina season in Final Four
Missing Tampa dentist accused of abandoning patients found in Pinellas County jail
Shadi Suleman promoted to Senior General Manager at Four Seasons Hotel Doha
Is It Better To Invest In An Annuity Or 401(k) For Retirement?
Munich Airport to welcome new airline and routes for summer 2023 schedule
Mavericks to protest two-point loss against Warriors claiming Golden State was gifted free basket
Türkiye expected to join list of water-poor countries by 2030
‘Little People, Big World’: Is the Roloff Family Friends With the Cast of ‘7 Little Johnstons’?
US hypersonic failure reveals a glaring weakness
Prince Harry and Meghan Markle Can ‘Reframe the Narrative’ if They Attend Coronation, Show ‘Humility,’ PR Expert Says
How to make S Korea-Japan rapprochement endure
How Sting’s ‘Ten Summoner’s Tales’ Was Different Than His Previous Albums
News21 hours ago
Donald Trump is seen with wife Melania at Mar-a-Lago
News21 hours ago
Fallout from Xi’s Russia visit will be felt first in Asia
News24 hours ago
Rich or poor? China’s ‘developing’ status faces fire
News6 hours ago
Pickup truck slams into Tampa supermarket
Tech23 hours ago
Google’s Shuffles Assistant Leadership to Focus on Bard AI
News16 hours ago
Trail Mix: GOP Circles the Wagons for Trump After Indictment
Lifestyle21 hours ago
Kelly Clarkson Seemingly Calls Out Divorce Drama in "abcdefu" Cover
News22 hours ago
‘Alaska Daily Episode 11 Recap: Who Killed Gloria?