HANetf 2022 wrap up and outlook for 2023: Where did the inflows go?

With inflation rising rates and the outbreak of war in Ukraine 2022 was a tough year for markets. Despite this turmoil HANetf was still able to secure net positive inflows. As of December 22nd HANetf captured $530 million in net new inflows for the year.

Recycled gold gains investor interest

Leading the pack was The Royal Mint Responsibly Sourced Physical Gold ETC (RMAU). Inflows into the ETC saw its AUM reach $791 million by the end of December representing a year-to-date AUM growth of 185%. The ETC experienced 11 months in a row of positive inflows in 2022 the only gold ETC in Europe to do so. RMAU captured almost 20% of European gold ETC flows in 2022. [1]

While RMAU first launched in February 2020 in 2022 the ETC became 100% backed by post 2019 LBMA responsibly sourced gold bars of which a large portion are backed by 100% recycled gold bars. These bars are created from gold scrap originating from The Royal Mint’s industrial functions. Recycled gold is 90%+ less carbon intensive than mined gold allowing investors to access gold in a more sustainable way. Many sustainable investors who would not consider gold ETCs previously are now using RMAU due to its ESG credentials.

The Royal Mint’s unique control over the supply chain of gold that backs RMAU was again demonstrated in 2022 following Russia’s 24th February invasion of Ukraine the decision was taken to remove all gold bars of Russian origin. The LBMA halted all Russian bars being added to the good delivery list but RMAU went one step further by removing all legacy bars. Towards the end of 2022 Reuters reported that other gold ETC issuers were following HANetf’s lead with many starting to remove their Russian gold bars but the average being held remaining at over 10% of holdings. [2]

Many commentators expect gold to perform well in 2023. Eric Strand manager of the AuAg ESG Gold Mining ETF (ESGO) argues: “we anticipate a new all-time high for gold during 2023 and the start of a new secular bull market.” He points to several sources of gold demand including central banks which “as a group continued since the great financial crisis to add more and more gold to their reserves with a new record set for Q3 2022.”

ESGO is unique in that it tracks ESG-screened gold miners with the index composed of the 25 gold mining stocks with best ESG scores as measured by Sustainalytics. ESGO’s index has been able to provide stronger performance than the popular S&P Gold Producers index. In the second half of 2022 the S&P Gold Producers Index returned just 4.3% compared to the Solactive AuAg ESG Gold Mining Index’s 11% showing that ESG investing need not be at the expense of returns. ESGO has Article 8 SFDR classification. [3]

Uranium theme heats up

One standout ETF in terms of net inflows was Sprott Uranium Miners UCITS ETF (URNM). Since its launch in May 2022 the ETF has seen $31 million of net inflows. Driving this has been a growing interest among investors in the “Nuclear Renaissance”. Around the world governments are increasingly accepting that nuclear energy will need to play a key role in decarbonising their energy supply. With its exposure to a basket of uranium miners and the spot price of uranium URNM is seen by many a pureplay way to gain exposure to this trend. This mix of assets is relatively unique in the world of ETFs that usually don’t include companies and the commodity together.

The ETF was created in partnership with Sprott Asset Management. Sprott are experts in the uranium space overseeing a US-listed ETF tracking the same index the North Shore Sprott Uranium Miners Index with around $700 million AUM. Sprott also oversees a physical uranium trust with almost $3bn AUM solidifying their place as world leading providers of uranium investing solutions.

The ETF was created in partnership with Sprott Asset Management. Sprott are experts in the uranium space overseeing a US-listed ETF tracking the same index the North Shore Sprott Uranium Miners Index with around $700 million AUM. Sprott also oversees a physical uranium trust with almost $3bn AUM solidifying their place as world leading providers of uranium investing solutions.

As Jacob White an analyst at Sprott Asset Management notes: “With the number of nuclear reactors planned to increase by 35% governments are signalling the need to embrace the reliable efficient clean and safe energy produced by nuclear to meet ambitious decarbonization goals. At the same time a uranium supply deficit remains entrenched and uranium miners may be the recipients of increased investment which may bring the market back into balance.”

Investors bet on the COVID-19 recovery

The Travel UCITS ETF (TRYP) also saw strong investor interest. Over the course of 2022 the ETF saw net inflows of around $23 million with its AUM now sitting at around $25 million having peaked at $40 million.[4] This reflected the desire of many investors to gain from the recovery of the travel and leisure sector post-Covid.

Similarly the U.S. Global Jets UCITS ETF (JETS) saw positive inflows with net inflows standing at $5.1 million and peaking at $15.5 million. JETS is the UCITS version of the popular US-listed U.S. Global Jets UCITS ETF (NYSE: JETS) and was Europe’s first global airline industry ETF.[5] JETS tracks the U.S. Global Jets Index providing access to the global airline industry including airline operators and manufacturers from all over the world. Its long-established US sister ETF has $2 billion in AUM. [6]

Looking ahead the travel sector still faces headwinds such as higher costs labour shortages and the potential of a recession. However the positive news is that the International Air Transport Association (IATA) expects a return to profitability for the global airline industry in 2023 as airlines continue to cut losses stemming from the effects of the COVID-19 pandemic to their business in 2022. [7]

Mexican bonds prove a hit

In 2022 HANetf expanded into the Mexican market through its partnership with Finamex one of the leading providers of access services to the Mexican stock market. The partnership has seen HANetf list 20 of its UCITS ETFs in Mexico as well as two of its ETCs The Royal Mint Responsibly Sourced Physical Gold ETC (RMAU) and SparkChange Physical Carbon EUA ETC (CO2).

One of the UCITS ETFs listed was the newly launched Finamex Mexico S&P/BMV International UMS Sovereign Bond 5-10yr UCITS ETF (MEXS) which provides exposure to Mexican governments bonds. Since it was listed in Mexico in July 2022 the ETF has reached an AUM of $33 million.

Demand for UCITS products is growing in Latin America due to the preferential tax treatment of UCITS compared to alternative wrappers. Finamex is a leading financial company in Mexico and is HANetf’s first Latin American client.

Tech stocks await slowdown of rate rises

With the Federal Reserve’s “lift off” from zero rates investor interest in tech-heavy ETFs was more muted. But that’s not to say there were no investors swimming against the tide. Several of HANetf’s growth and tech focused ETFs experienced positive inflows.

EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (EMQQ) saw net inflows of $7.5 million. Total AUM in EMQQ has stayed stable at $210.6 million.[8] EMQQ was HANetf’s first product launched in 2018. The ETF tracks the EMQQ Index which seeks to provide investors exposure to online consumption in the developing world.

ETC Group Global Metaverse UCITS ETF (METR) also saw positive inflows with net inflows standing at $5.5 million. Launched in March METR was Europe’s first Metaverse ETF providing exposure to companies that are involved in the growth of the nascent Metaverse sector. ETC Group are digital assets specialists and have brought that expertise to support METR with great content and expertise.

Investor interest in such themes we believe should continue to grow over the long term. That said demand in 2023 will also be affected by the outlook for interest rates. On this front Anthony Ginsberg manager of the HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) and HAN-GINS Cloud Technology Equal Weight UCITS ETF (SKYY) argues that we may be nearing the end of the tunnel when it comes to rate rises. SKYY is Europe’s first cloud technology themed ETF and focuses on one of the tech sectors most exciting themes. Ginsberg argues: “We believe that US Inflation has peaked. Resulting slower Fed rate rises will hopefully prove positive for quality tech and other growth stocks in 2023.”

Maintaining market share in the crypto winter

The cryptocurrency space also had a volatile 2022 with several notable drawdowns. Within this tough market environment ETC Group has seen its market share of cryptocurrency ETPs hold up well. By the end of 2022 ETC Group’s market share stood at around 13% holding steady throughout the year.

When it came to Bitcoin ETCs the BTCetc -ETC Group Physical Bitcoin (BTCE) remained the largest by market share accounting for over a third of all assets in Bitcoin ETCs. That was roughly the same as its market share at the end of 2021 and slightly up from June 2022. It was a similar story for ETC Group’s ETHetc – ETC Group Physical Ethereum (ZETH) which accounted for around 12% of Ethereum ETP market share at the end of 2022.

Meanwhile ETC Group’s share of smaller coins (i.e. those that track coins other than Bitcoin and Ethereum) has grown from 0.8% in September 2022 to almost 1.2% at the end of the year. One small coin ETC that has seen stronger growth has been the XRPetc -ETC Group Physical XRP. Since its listing on 19th April 2022 it has seen its AUM grow by 166.5%.

Focusing just on products listed on Germany’s XETRA BTCE and ZETH accounted for the highest amount of turnover both accounting for 50% in 2022. BTCE accounted for 46.7% and ZETH 12.2%.

Looking ahead the debacle surrounding certain crypto exchanges should strengthen the case for ETCs. As Torsten Dueing Head of ETC Platforms at HANetf notes: “Market volatility is something an investor inherently signs up to when buying any asset. Market related losses can be explained: the market went down and hence the investors have (potentially unrealised) losses in their portfolio.”

However the problems seen among crypto exchanges in 2022 introduced a new risk: structural risk. That is the way investors make an investment and how those assets are held. With the risks of using such unregulated exchanges now apparent we expect more investors to opt for regulated cryptocurrency ETPs which are subject to a high degree of regulation.

But within the ETC space structure still matters. As Tom Rodgers Head of Research at ETC Group notes: “Following the 2008 financial crisis regulators imposed strict rules and transparency requirements on ETFs around these areas of concern. These are not currently being observed by many crypto ETP providers. ETC Group believes it is important that crypto ETP issuers maintain standards which are aligned with those that ETFs are subject to as a minimum to ensure risk management is robust and investors understand the structure and inherent risks.”

ETCs following the highest standards and providing for the highest standards of transparency we believe will become increasingly appealing to investors looking for exposure to the still-exciting digital asset space.

Cryptocurrencies are highly volatile. When you invest in ETFs and ETCs your capital is at risk.

Clean energy -a bright outlook?

Clean energy stocks were also hurt by rate rises and market volatility in 2022. As a result inflows into funds capturing this theme were also more muted. Solar Energy UCITS ETF (TANN) saw net inflows of $4.6 million while HANetf S&P Global Clean Energy Select HANzero™ UCITS ETF (ZERO) received $2.4 million.

Looking ahead there are several reasons to believe these inflows may pick up in 2023. When it comes to ZERO the unique features of this ETF are likely to prove attractive to investors. The ETF tracks the original 30 stocks S&P Global Energy Select Index meaning it provides more pureplay exposure than the other roughly 100 stock index. Uniquely however the ETF uses carbon offsets to neutralise the emissions associated with the portfolios holdings making ZERO a carbon neutral ETF. At HANetf we believe carbon offsets used in this way will grow in ubiquity. In the same way many ETFs now also have a currency hedged version there will be a carbon offset version of many ETF.

The outlook for solar energy also looks strong in 2023 potentially enticing investors into the theme. As Stephen Derkash manager of the Solar Energy UCITS ETF notes: “Global solar demand is expected to continue to grow rapidly in 2023 and beyond for three main reasons: low cost net-zero emissions policy and nations’ increased desire for energy security. Solar is expected to be the fastest growing energy sub-segment in 2023 with demand set to increase 20-30%.”

Gabriela Herculano manager of the iClima Global Decarbonisation Enablers UCITS ETF (CLMA) argues that markets are currently not pricing in decarbonisation. She argues: “When looking at the share performance of the iClima Global Decarbonization Enablers Index representing 170 of the listed companies with products and services that move us away from the high emissions unsustainable way we run our economies the conclusion is that markets are pricing a no transition or a slow transition.”

This Herculano says is mistaken. The problem as she sees it is that the increase in consumption of coal and a surge in LNG demand in 2022 is being interpreted as the world not having alternatives. But she argues in reality the high prices of fossil fuels are creating demand destruction which will speed up the energy transition. “The acceleration of adoption of the green alternatives is real. Therefore our view is that the most relevant sizeable and impactful investment opportunity of our lifetime will stop being discounted in 2023” concludes Herculano.

CLMA is a unique climate change ETF which provides investors with access to companies that directly enable CO2 avoidance thereby shining a spotlight on climate change innovators. The ETF has an Article 9 SFDR classification the highest possible.

Looking ahead

There’s no denying that 2022 was a tough year for investors and financial markets. With few exceptions asset prices were down across the board and investors became increasingly bearish. But despite this there were several areas of the market that investors were prepared to allocate capital. Largely this meant investors looking for gold exposure as a safe haven with RMAU proving an attractive option for those concerned about sustainability. In other cases it meant investors attempting to see through the current market turmoil allocating to themes as diverse as global travel the metaverse or the growth of nuclear and clean energy.

What 2023 holds remains to be seen. A slowdown in rate rises may see more investors start to move back into the growth and tech stocks. Meanwhile with plenty of potential risks on the horizon demand for gold will we suspect remain high. At the same time the ongoing energy crisis should see uranium and clean energy continue to attract inflows.

When you invest in ETFs and ETCs your capital is at risk.

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