With less than a month left in 2022, total exchange traded fund (ETF) flows are set to top $600 billion for the second year in a row, even as mutual funds are on pace to lose more than $700 billion.1
But as high as 2022 ETF flows have been, they didn’t break their 2021 record of $900 billion. Still, that doesn’t mean fewer investors traded ETFs this year than last. In fact, based on secondary market trading data (not primary market fund flows), investors’ ETF usage reached new, record-breaking heights in 2022.
Keep in mind, fund flows are a summation statistic — meaning the end result of all the other actions that took place before it. Because of ETFs’ multiple layers of liquidity (secondary and primary markets), not all investment activity is reflected in fund flows. You have to look at secondary market trading.
In fact, for every $10.6 traded on the secondary market in 2022, only $1 hit the primary market, on average.2 Historically, per the prior 5-year average, $1 would hit the primary market for every $9.03 traded on the secondary market.3 So this year, more than normal, secondary market demand was met with similar supply — and the primary market wasn’t always needed to execute an investment decision.
Because not every trade, or investor action, corresponds to fund flows, flows may not fully reflect total ETF usage. But trading volume does. After all, as ETFs are exchange traded, this means that every investor action in an ETF results in a secondary market trade printed on an exchange.
ETF trading volumes set a new record in 2022, with over $40 trillion, as shown below. There was depth to this trend too, as all major asset classes have already hit their own records, except for commodities. But the final tally for commodity funds, too, is likely to surpass the $1.056 trillion record set in 2020.
Over the last ten years, ETFs have made up roughly 26% of all trading volume on US exchanges, on average. But given the popularity of meme stocks, due to their lofty gains at the outset of the pandemic, and higher retail participation in single equities, ETFs’ percentage of overall exchange volume declined in 2020 and 2021.
But as you know, meme stock favorites came crashing back to down to earth in 2022 and single stock retail trading sank by nearly 40%.4 As a result, ETF trading volume made up a much larger percentage of exchange volume in 2022 — its highest in over a decade.
Almost a third of all trading volume on US exchanges was in an ETF in 2022, as shown below. In fact, the lowest percentage of ETF trading volume on a single day in 2022 (26.5%) was more than the entire average from the prior two years (25.9%).
This increase reflects investors’ using more macro exposures to position portfolios in response to the confluence of macro risks impacting asset classes this year. Investors chose ETFs, whether for hedging purposes, given the fungibility of ETFs to go long or short, or for exposure management, given how precisely some ETFs target a specific market of focus.
For example, sector trading volumes reached a record-breaking $6.7 trillion in 2022, with investors opting to use sectors in lieu of single stock allocations, to express a thematic or tactical investment.5 In fact, eight out of the 11 GICS sectors saw record trading volumes in 2022. Technology and Energy led the way — the first time ever two sectors each saw more than $1 trillion in total volume in a given year.6
Do you remember how McDonalds used to have a sign outside each location showing the number of burgers sold? Given the record amount of ETF trades executed in 2022, there should be a similar running tally at the exchanges.
Over 12.3 million ETF trades were executed a day in 2022.
That’s almost 5 million more than the prior record set in 2021, and well above the prior 10-year average (4.3 million). Incredibly, more than 2.8 billion trades were executed in 2022 overall — up 50% from 2021 (1.9 billion). This 50% increase outpaces even the 22% jump in total trading volumes.
This highlights two important trends:
Depending on the ETF, there may be options listed on it for investors to trade.
Options on ETFs allow for more complex, sophisticated use-cases to be implemented for a variety of exposures (e.g., US equities, banks, oil stocks, or high-yield debt) with precision and ease. And, with the exception of broad areas like the S&P 500, the options ecosystem in ETFs is unmatched in terms of its depth, choice, and flexibility.
There was significant demand for what the ETF option ecosystem had to offer in 2022, with over 3 billion options contracts changing hands, as shown below. That’s 40% more than the record set in 2021 and 125% greater than the average over the past decade.
New ETF product strategies, such as defined outcome funds, have sought to harness the more developed and widespread ETF option ecosystem.
These types of funds now have $19 billion in assets, up from $9 billion one year ago.8 This growth of a structured product-like investment vehicle in a daily transparent liquid ETF wrapper has helped pushed options volumes tied to ETFs higher.
The rise of new strategies, however, wasn’t the only driver. Market demand for various directional trades or portfolio hedges also spiked ETF option volumes. Short-dated (close to expiry and more volatile/sensitive) ETF option volumes surged, coinciding with activity witnessed in single stock options as well.9 And, put-side volumes made up 55% of overall volumes, a higher percentage than the last two years when the market was rallying and downside protection was less of a concern.10 Given the bear market in 2022, this protection trade tailwind isn’t a complete surprise.
The bottom line is, the increased usage of ETF options reinforces the fungibility and flexibility of the ETF itself. And as the use of options grows, assets in corresponding ETFs should see a lift as a result of market makers needing to hedge their own counterparty risk exposure. This is a characteristic trait, and area of growth for ETFs, that separately managed accounts or mutual funds won’t be able to benefit from.
As our just-released 2023 Market Outlook talks about, investors are likely to see a bit more of the same next year, at least initially, pending a potential policy pivot from the Federal Reserve (Fed).
With higher rates, slowing growth, weakening sentiment, and heightened geopolitical risks forecast to carry over into the new year, the same investor behavior we saw in 2022 is likely to persist.
With the ever-present macro and micro risks still impacting sentiment, the volatility environment that saw ETF volumes move with a better-than-average 73% correlation to CBOE VIX levels in 202211 is unlikely to change in 2023.
As a result, these four trends in elevated ETF usage are also likely to persist. And for those who don’t already have ETF exposure, now may be the time to take a closer look at the depth of strategies available.
1 Morningstar as of December 7, 2022.
2 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations.
3 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations.
4 “Crypto Collapse, Rising Rates Have Retail Investors in Retreat”, Bloomberg December 7, 2022.
5 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations.
6 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations.
7 Bloomberg Finance, L.P., as of December 7, 2022 per the GS High Retail Sentiment basket.
8 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations.
9 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations and “Stock Traders Pile Into Boom-or-Bust Option to Play Stock Market Volatility”, Bloomberg October 6, 2022.
10 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations.
11 Bloomberg Finance, L.P., as of December 7, 2022 based on SPDR Americas Research calculations based on annual averages of trailing 60-day correlations of CBOE VIX Index ten-day average readings versus 10-day average ETF volumes. Long-term average correlation is 57% in a specific year.
CBOE VIX Index
The VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500® Index, and is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes.
GS High Retail Sentiment Basket
The GS hard-to-borrow Retail favorite basket consists of US listed equities that are most popularly mentioned on WallStreetBets. The basket is modified equal weighted but has INCLUDED stocks with potential borrow constraints.
S&P 500 Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
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