Industry Updates

Best performing ETFs of 2023

Blockchain stocks and tech-focused ETFs were among the top performers last year

Lauren Gibbons

Crypto globe

Last year was marked by stellar returns across tech-focused ETFs. Crypto, semiconductor and metaverse ETFs all shot the lights out amid slowing rate hikes from the Federal Reserve and Nvidia’s boom.

Improved inflation data coupled with expectations of rate cuts in the latter half of 2024 led to triple-digit returns from blockchain equity ETFs in 2023.

Blockchain equity ETFs had a strong finish to the year, seeing inflows of $122m in the second week of December, bringing the nine-week run to $294m, the largest on record, according to CoinShares data.

Semiconductor and metaverse ETFs were also among the top performers last year, with exposure to the ‘magnificent seven’ chipmaker Nvidia delivering impressive returns.

Better-than-expected Q1 results from the tech giant meant ETFs with Nvidia exposure saw a welcome boost in May.

Softening inflation and Fed interest rate pauses have also played a strong part in boosting thematic ETFs across the board in 2023.

Crypto’s comeback

After a shaky year for crypto in 2022, blockchain equity ETFs staged a mighty comeback in 2023.

The performance of blockchain ETFs was supported by first a slowing down and then a pausing of Fed interest rate hikes, generating an increased risk appetite among investors.

Crypto equity ETFs are expected to continue along a similar trajectory in 2024, with the Fed expected to cut interest rates three times next year as US inflation continues to drop from 40-year highs.

The biggest cryptocurrency and touted as the best indicator of the overall market performance, bitcoin, saw its value more than double last year, soaring to a 20-month high last November.

Bitcoin’s rally in turn lifted the shares of cryptocurrency-related companies and ETFs.

The cryptocurrency’s boost is in part underpinned by market sentiment surrounding a potential spot bitcoin ETF. The approval could provide clarity on the legal and regulatory status of bitcoin, helping address concerns related to market manipulation, insider trading and other illicit activities.

Reports in October indicated that the Securities and Exchange Commission (SEC) would not appeal a court ruling that the agency had been wrong to reject its spot bitcoin ETF application.

SEC Chair Gary Gensler's statement last October said he was open to considering up to 10 spot bitcoin ETF filings.

In June, financial services heavyweights and asset managers such as Fidelity Investments, BlackRock, ARK Investment Management, WisdomTree and Valkyrie submitted filings to the SEC. The move peaked investor's interest and saw ETPs record inflows of $199m at the end of June – $187m of which flowed into bitcoin – correcting almost nine weeks of outflows.

All of these factors have helped crypto equity ETFs outperform in 2023. Leading the way was the VanEck Crypto and Blockchain Innovators UCITS ETF (DAGB) which delivered returns of 283.3%, the most across all European-listed ETFs.

This was followed by the Global X Blockchain UCITS ETF (BKCG), which soared 268.7%, while the iShares Blockchain Technology UCITS ETF (BLKC) and the WisdomTree Blockchain UCITS ETF (WBLK) jumped 199.4% and 150.6%, respectively.

Two of HANetf’s funds, the ETC Group Digital Assets and Blockchain Equity UCITS ETF (KOIP) and the Grayscale Future of Finance UCITS ETF (GFOP), posted returns of 143.4% and 135.5%, respectively.

Nvidia boosts thematics

Returns from semiconductor, metaverse and AI ETFs alike were boosted by exposure to tech giant Nvidia after it hit a $1trn market cap in May.

The chipmaker enjoyed its share price increasing 35% after $7.2bn of sales were comfortably ahead of $6.5bn forecasts. Net income of $2bn also followed suit, ahead of $1.5bn predictions.

The tech giant has many different business areas which justifies its inclusion in these three megatrends.

The Amundi MSCI Semiconductors ESG Screened UCITS ETF (SEMG), which has a 28.3% weighting to Nvidia, skyrocketed 79% in 2023 while the VanEck Semiconductor UCITS ETF (SMGB) has a 9.5% exposure to the chipmaker, with investors enjoying 72.6% returns.

Metaverse ETFs featuring Nvidia also yielded strong returns for investors. These thematic ETFs shook off a tempestuous 2022, with the Franklin Templeton Metaverse UCITS ETF (METU), which holds a 5% Nvidia weighting, returning 71.5%.

It was a similar story for the L&G Metaverse ESG Exclusions UCITS ETF (MTVG), which has a 5.1% weighting and jumped 68% in 2023.

The boom of generative AI in 2023 – notably the launch of ChatGPT in November 2022 – has aided the growth of ETFs with Nvidia weightings last year.

OpenAI’s ChatGPT catapulted tech ETFs into the spotlight, with investor attention pivoting to companies involved in AI software and computer chip production.

The Xtrackers Artificial Intelligence & Big Data UCITS ETF (XAIX) shot up 68.4% amid a 7.5% Nvidia weighting. Echoing this was the Global X Robotics & Artificial Intelligence UCITS ETF (BOTG), which has an 8.8% weighting and increased 31.3% over the 12 months.

While these AI ETFs delivered stellar returns in 2023, XAIX and BOTG returned -26.9% and -35.5% in 2022, respectively.

Despite volatility, a long term view is justified, with Bloomberg Intelligence noting the generative AI market is expected to skyrocket to $1.3trn over the next decade.

More broadly, improved inflation data coupled with expectations of rate reductions in the second half of 2024 have been instrumental in preserving market optimism for tech-focused ETFs. If predictions are correct, tech ETFs should continue to deliver attractive returns for investors in 2024.

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