It’s the beginning of a new year. As we look forward to 2023, it is important for investors to reflect upon the developments of the past year and consider how best to position their portfolios for the year ahead.
2022 was a tumultuous year to say the least – starting with rampant Covid-19 infections, shifting to the tragic war between Russia and Ukraine, and littered with fears of persistent inflation, rising interest rates and energy crises throughout the year.
The overall market performance suffered as a result of the instability, with the U.S. S&P 500 index losing ~19% of its value in the year. The commodity over-weighted Canadian S&P/TSX Index fared somewhat better, only losing ~9% of its value in 2022.
Winners of 2022 in the Canadian ETF space
Despite the overall market performing poorly, there were some bright spots. Below, we highlight some of the winners of 2022 in the Canadian ETF space.
The clear-cut winner of 2022 was the Energy sector, particularly oil & gas. The top five best performing ETFs in Canada in 2022 were all within the Energy sector. This includes:
- Horizons S&P/TSX Capped Energy Index ETF – CAD (HXE) +53% return in 2022
- iShares S&P/TSX Capped Energy Index ETF – CAD (XEG) +52% return
- Horizons Natural Gas ETF – CAD (HUN) +46% return
- BMO (TSX:BMO) Equal Weight Oil & Gas Index ETF – CAD (ZEO) +39% return
- Horizons NYMEX Crude Oil ETF – CAD (HUC) +24% return
Energy-related ETFs performed extremely well on the back of rising commodity prices in the oil and natural gas space. The war between Russia and Ukraine led to disarrayed energy supply chains and heightened national attention on energy security, thus leading to a large rally in oil prices to start the year.
While commodity prices cooled off to the end the year, the 2023 outlook for the Energy space continues to be fairly robust as oil & gas producers have remained very disciplined in capital spending – leading to a potential structural undersupply and supporting higher commodity prices for longer.
Outside of the Energy sector, the following funds also enjoyed relatively strong performance in 2022 :
- iShares Global Agriculture Index ETF – CAD (COW) +13% return
- iShares S&P/TSX Capped Consumer Staples Index ETF – CAD (XST) +10% return
- Horizons USD Cash Maximizer ETF – CAD (HSUV.U) +9% return
These other winners make logical sense given that they are lower-volatility ETFs. The poor market conditions likely led to a “flight-to-safety” to these more defensive ETF plays.
ETF Losers of 2022
Although there were some winners in 2022, the majority of the market took losses as essentially every sector outside of Energy and Consumer Staples performed poorly. Losses were severe in risk-on assets such as cryptocurrenciesand speculative stocks such as marijuana companies whose underlying value (or lack thereof) was brought into sharp focus in 2022. While Energy was the clear-cut winner of 2022, the clear losers were cryptocurrencies and pot-stocks, with the top five worst performing ETFs in Canada related to one or the other. This includes:
- Horizons U.S. Marijuana Index ETF - CAD (HMUS) -70% return in 2022
- Purpose Marijuana Opportunities Fund ETF - CAD Hedged (MJJ) -69% return
- Evolve Ether ETF - CAD (ETHR) -67% return
- CI Galaxy Ethereum ETF - CAD (ETHX.B) -65% return
- Purpose Ether ETF - CAD (ETHH.B) -65%% return
Rising interest rates wreak havoc on speculative investments such as unprofitable companies (marijuana, emerging tech) and cryptocurrencies such as Bitcoin and Ether. Before the start of 2022, the market had been conditioned into thinking that interest rates would stay low indefinitely. Clearly, last year served as a stark reminder to the contrary.
Looking ahead, it is important for investors to recognize the importance of a well-diversified portfolio. Overweighting speculative investments to try and “get-rich-quick” is a recipe for disaster, and 2022 was a resounding reminder of this.
This content was originally published by our partners at the Canadian ETF Marketplace.