It’s a new year, which is a great time to look back at the year just gone to look for lessons, and sometimes to figure out just what on earth happened. To kick off what will inevitably be a period of retrospection, we figure out just what on earth happened in the world of exchange-traded funds.
We can reveal that, while silver and nickel topped the performers' list of ETF themes last month, it was Turkish equities that took the crown on the entire year.
As we do every month, we have taken a look at the key trends across exchange-traded products (ETPs), both in December and in 2022, excluding inverse and leveraged funds.
Being purely passive products, these instruments reflect the evolution of the markets without the bias (good or bad) of an active manager.
H2 Tops and Flops of 2022
Let’s start with the tops of the full year. With a stunning 116% return, the best-performing exchange-traded product of 2022 was the Lyxor MSCI Turkey UCITS ETF Acc GBP (TURL).
The Istanbul Stock Exchange doubled its value in 2022 thanks to an unconventional decision to cut interest rates, despite galloping inflation (over 85% year-on-year).
Instead of cooling the price index run, the central bank cut interest rates by 3.5 percentage points to 10.5% since last August. Due to such negative real interest rates and unattractive government yields, domestic investors have sought refuge from the price explosion in cheap equities, driving up values, especially in local currency.
One might imagine that the reason behind this result might be the Turkish market's heavy exposure to the energy sector, which has grown by 44% since the beginning of the year (as measured by the Morningstar Global Energy Index). It has recorded the best performance among economic sectors. But energy stocks do not even reach 5% of the portfolio of the Morningstar Turkey Index.
If we take a closer look at the returns of the benchmark, we realise it was the sectors most sensitive to the economic cycle, such as manufacturing, consumer goods, commodities and financial services, which really drove the market.
Generally speaking, despite this incredible rally, Turkish stocks still have attractive attributes, and the long-term economic outlook is far from bleak. Beware, however, of the dangers: compounded by rising gas and oil prices (of which Turkey is a net importer), the weakening of the lira, and the slowdown in global demand, the current account deficit rose to 4.5% of GDP – and inflation skyrocketed. Adding to this economic picture is the growing political uncertainty. In June this year the country will hold presidential elections which could prove a crucial junction for the near future of the country.
Bottom 2022 ETFs
Among the laggards of 2022, however, we find instruments exposed to cryptocurrencies and digital assets, as well as the cannabis sector and cloud computing. VanEck Crypto & Blockchain Innovators ETF A USD Acc (DAPP) was the worst-performing ETF of 2022, losing 84%.
Best December Performers
There are about 46 percentage points between the best- and worst-performing exchange-traded products in December, with returns for the month ranging from 13.1% to -33.9%. The top 10 is largely dedicated to two metals: silver and nickel.
Xtrackers Physical Silver EUR Hedged ETC (XAD2) topped the list of last month’s performers, gaining 13.1%. Silver's spot price rose by 7% in December, driven by the prospect of a less aggressive Federal Reserve in the coming months and the reopening in China with the end of the zero-Covid policies. The currency effect also played a role here: ETC’s return was also pushed by the devaluation of the US dollar against the euro.
Second place is held by Elementum Physical Nickel ETC (TNIK), which gives access to the movements in the nickel spot price, an industrial metal used as an ingredient in steel and batteries, and also in other sectors, such as jewellery and clothing.
It is precisely the growing production of batteries that is expected to push up the price of nickel (as well as lithium, cobalt and graphite) for at least the next decade.
The December Laggards
The ranking of the worst performing exchange-traded funds in December, on the other hand, is much more heterogeneous: there are instruments exposed to energy commodities, thematic investments such as blockchain, and the green energy and e-mobility sectors.
In particular, the natural gas market suffered a major setback; in the US Henry Hub market, to which dedicated ETCs are exposed, there was a 27% drop in spot value in December (in USD).
On the European TTF market the price per megawatt hour dropped from €140 to €76 between the start and the end of December. This is good news, but it should not make us forget all the challenges that await us in 2023 on the energy front.
At the same time, the effect of the collapse of Bahamas-based cryptocurrency trading platform FTX continues. Sam Bankman-Fried, the founder and former CEO of FTX, is accused of fraud and money laundering. According to the Wall Street Journal, Bankman-Fried will plead not guilty at a US hearing scheduled for next week.
The affair has dealt yet another blow to the crypto universe, in particular to cyrpto coin Solana (SOL), whose ecosystem has long been supported by Sam Bankman-Fried himself – so much so that he was practically considered the project's guarantor. FTX itself had the equivalent of $982 million in SOL among its liabilities on November 10, as reported by the Financial Times, which has seen the company's balance sheets.
