2022 is firmly in the books, and I bet a lot of investors are breathing a sigh of relief. While the S&P/TSX 60 escaped relatively unscathed thanks to its high concentration of energy stocks, the same cannot be said for the U.S. market, which performed poorly as mega-cap tech stocks melted down.
Even the supposedly "safe" bond market suffered heavy loss as central banks worldwide initiated aggressive campaigns of interest rate hikes, sending bond yields soaring and bond prices plummeting. Indeed, there weren't many safe assets in 2022, asides from liquid alternatives and cash assets.
Now, I don't have a crystal ball, so I can't predict where the markets will go for 2023. That being said, recency bias is very real, and trends tend to sustain themselves until another catalyst emerges. Here's what I think the Canadian ETF market will gravitate towards in 2023.
HISA ETFs
Many investors fled to cash-like high-interest savings account, or HISA, ETFs in 2022 after seeing their supposedly "safe" aggregate bond ETFs lose more value than the S&P/TSX 60 index. With rates still on the rise and inflation well-above the Bank of Canada's long-term target, I expect these inflows to persist.
This behavior is understandable. Thanks to the aggressive rate hikes, some HISA ETFs are now offering gross annual yields of up to 4.78%, with none of the lock-up periods seen with GICs. In a brokerage account, these products are as safe as it gets.
For many investors who started during the low-interest rate bull market of the COVID-19 pandemic, the losses in 2022 likely triggered some strong loss aversion tendencies. Hence, the classic "flight to quality" effect seen, with these ETFs being a literal safe haven.
- Purpose High Interest Savings ETF (PSA)
- Evolve High Interest Savings Account Fund (HISA)
- CI First Asset High Interest Savings ETF (CSAV)
- Horizons High Interest Savings ETF (CASH)
Covered Call ETFs
"A bird in the hand is worth two in the bush", or so they say. This phrase also sums up the appeal of covered call ETFs, which produce consistent monthly income in exchange for muted upside gains. During a volatile market environment, these ETFs stand to attract more attention. Why?
Firstly, increased volatility tends to also increase the size of options premiums, which means more yield for these ETFs. Secondly, a sideways trading market ensures that there is a higher chance of the call options expiring out of the money, which is beneficial for a covered call ETF.
Canadian ETF managers have taken note of this trend, with numerous releases over the last few months. For example, Purpose Investments released the first single-stock yield ETFs, while Evolve ETFs released their new enhanced yield index ETFs, adding to the already large Canadian covered call ETF landscape.
- BMO (TSX:BMO) Canadian High Dividend Covered Call ETF (ZWC)
- BMO Covered Call Dow Jones Industrial Average ETF (ZWA)
- CI Energy Giants Covered Call ETF (NXF)
- CI Tech Giants Covered Call ETF (TXF)
- Evolve Global Healthcare Enhanced Yield ETF (LIFE)
- Evolve Global Materials & Mining Enhanced Yield Index ETF (BASE)
Liquid Alternative ETFs
The bond bear market also shifted investor attention towards a previously neglected portion of the Canadian ETF landscape: liquid alternatives. In short, these funds provide retail investors with hedge-fund like strategies in an accessible and transparent ETF structure.
Thanks to regulatory changes in 2019 that permitted ETFs to employ strategies using short positions, leverage, and derivatives, these ETFs are now widely available. As a whole, they tend to have higher fees, with some even adopting the hedge fund industry's incentive structure.
That being said, their performance in 2022 was stellar, with many liquid alternative ETFs ending the year in the green while achieving a low correlation with stocks and bonds. When it comes to absolute positive returns uncorrelated with the markets, few assets do as well as liquid alternatives.
- Picton Mahoney Fortified Market Neutral Alternative Fund (PFMN)
- NBI Liquid Alternatives ETF (NALT)
- Desjardins Alt Long/Short Equity Market Neutral ETF (DANC)
- AGFiQ US Market Neutral Anti-Beta ETF (QBTL)
This content was originally published by our partners at the Canadian ETF Marketplace