Add this to the long list of market surprises in the first quarter of 2023: The worst-performing exchange-traded funds still managed to attract massive amounts of cash.
U.S. ETFs tracking the sinking natural gas market and ones making magnified bets against the again-booming tech sector have, unsurprisingly, seen their prices tumble.
Yet these funds ranked near the top of the leader board for inflows.
"It has not paid to be bearish on semis (semiconductors) and technology," said Jane Edmondson, chief executive officer of EQM Capital. "Many investors have clearly been positioned wrong this quarter, not expecting a rebound in big tech in January, again surprised in February that the Fed was not going to back down on interest rates, only to be rewarded with another tech rebound in March thanks to the Fed-induced banking crisis."
To be sure, there's only so much you can read from flows during a period in which investors were buffeted by shifting rate expectations, a banking crisis, confusing inflationary signals and more. Against that backdrop, the most dependable trend was a flood of cash into the safety of government bond ETFs.
In addition, a calendar-based read of flows can offer a misleading picture. For instance, activity can be affected by periodic tax concerns or end-of-year portfolio adjustments. And big flows to or from leveraged products can reverse quickly, since they aren't intended to be held for long.
Two leveraged products — the Direxion Daily Semi Conductors 3X Shares (ticker SOXS), a fund that pays three times the inverse return of the ICE Semiconductor Index, and the ProShares UltraPro Short QQQ (SQQQ), which returns three times the inverse of the Nasdaq 100 — have both fallen more than 40% this year. Yet each ETF has seen massive inflows, according to Bloomberg data.
Then there's the ProShares Ultra Bloomberg Natural Gas (BOIL), which was the worst-performing ETF in the quarter, down 80% as the unusually warm winter caused gas demand — and prices — to drop. Still, investors have added a net $1.67 billion to the fund since the start of the year, resulting in flows equaling 291% of its total market cap, according to data compiled by Bloomberg.
"That is an ETF investment play on the Ukraine-Russia conflict and people were thinking natural gas prices would soar due to supply chain issues in Europe," said Edmondson. "But Mother Nature intervened, and it has been a pretty mild winter in Europe. So concerns about Europeans freezing to death over the winter were thankfully overblown."
Excellent performance in the first quarter doesn't mean great cash as six out of the top 10 best performing funds saw net outflows. MicroSectors FANG+ Index 3X Leveraged ETN (FNGU), a fund that triples gains in big tech stocks, has jumped 152% year-to-date. The fund only had $50 million in net inflows.
Cathie Wood's flagship, the ARK Innovation ETF (ARKK), gained 29% in the first quarter, although it was still down from its February 2021 peak. The fund saw net flows of only $199 million in the quarter following last year's tech pain that sent the fund down 67%.
"It's down 75% from its peak, so to me, the fact that it has positive flows in 2023 is impressive," said James Seyffart, an ETF analyst for Bloomberg Intelligence. "Investors have largely hung in there with Cathie and Ark but it doesn't look like too many are piling in."
Other Wood's top performing ETFs like the Ark Next Generation Internet ETF (ARKW) and ARK Fintech Innovation ETF (ARKF) saw net outflows in the quarter.
Bitcoin was another big winner this quarter with a 70% gain, and a fund tied to the asset class, ProShares Bitcoin Strategy ETF (BITO), was also up by 70%. It had $35 million in net flows.
"Investors without a long-term perspective, trying to time certain sector exposures, have definitely been whipsawed," said Edmondson. "The nice thing about ETFs, is that it does facilitate the ability to nimbly pivot in volatile times. That can be both a good and bad thing."
