Money is flowing into 2023's worst-performing funds

In the first quarter of 2023, there was yet another surprise on the market, as even the worst-performing exchange-traded funds attracted massive influxes of cash, despite their poor performance. 

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Although it is not surprising to see the prices of US ETFs tracking the sinking natural gas market and those making magnified bets against the once-booming tech sector also plunge, these funds accounted for the majority of inflows at the end of the year. 

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Jane Edmondson, the chief executive officer of EQM Capital, told me that being bearish on semis and technology had not paid off. A number of investors have clearly been wrongly positioned this quarter, since they did not expect big tech to rebound in January, and then were surprised by the Fed's refusal to back down on interest rates again in February, and were rewarded with a return to the tech market in March due to the Fed-induced banking crisis." 

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• ProShares Ultra Bloomberg Natural Gas

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• JPMorgan BetaBuilders Europe ETF

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• SPDR Bloomberg 3-12 Month T-Bill ETF

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• Direxion Daily Semiconductors Bear 3x Shares

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• JPMorgan Nasdaq Equity Premium Income ETF

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• ProShares UltraPro Short QQQ

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• Direxion Daily 20-Year Treasury Bull 3X

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• SPDR Portfolio Intermediate Term Treasury ETF

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• Pacer Global Cash Cows Dividend ETF 

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• iShares 0-3 Month Treasury Bond ETF

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A period of fluctuating rate expectations, the banking crisis, confusing inflationary signals and so on makes it very difficult to read the flow of money as it does in a period when investors faced shifting rate expectations, a banking crisis, and other adversity. It was against that backdrop that the most reliable trend was the flood of cash into government bond ETFs, which provided a degree of safety to investors.

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As well, a calendar-based look at flows could be misleading as well. For instance, tax concerns can affect activity, or portfolio adjustments may take place at the end of the year. As leveraged products are not intended to be held for long periods of time, big flows from or to them can reverse quickly.

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Direxion Daily Semi Conductors 3X Shares (ticker SOXS), which pays three times more than the inverse return of the ICE Semiconductor Index — two leveraged products — have both fallen more than 40% this year. These funds are both backed by ProShares UltraPro Short QQQ (SQQQ), which has three times the inverse return of the Nasdaq 100. According to Trade Algo data, however, there have been huge inflows into each ETF.

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It was also the most poorly performing ETF in the quarter, with ProShares Ultra Bloomberg Natural Gas (BOIL), down 80% during the period as the unusually warm winter resulted in lower gas demand - and lower prices. The fund has still seen net investments of $1.67 billion since the beginning of the year, which has resulted in flows equal to 291% of its total market cap. According to Bloomberg's data, investors have contributed to the fund by putting in $1.67 billion worth of net investment. 

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Despite the fact that people were thinking that natural gas prices would soar as a result of supply chain issues in Europe, Edmondson said that it was an ETF investment play on the Ukraine-Russia conflict. The winter of this year has been quite mild in Europe, thanks to Mother Nature’s intervention. The fears of Europeans freezing to death during this winter have been thankfully overblown. 

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There has been a net outflow of six out of the top 10 best performing funds in the first quarter. This is despite the fact that six out of the top 10 funds performed well in the first quarter. A fund that triples the gain on big tech stocks, MicroSectors FANG+ Index 3X Leveraged ETN (FNGU), has gained 152% year-to-date, even though only $50 million has been inflowed into the fund.

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The Cathie Wood-led innovation ETF, the ARK Innovation Exchange Traded Fund (ARKK), gained 29% in the first quarter, when compared to its February 2021 peak. ARK Innovation ETF is still down 67% from its peak level last year, when the fund began losing 67% of its value after last year's tech pain, which sent the position plunging 67%.

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Considering how far in the past seven years it has gone, I think it's so impressive that it has had positive flows in 2023, according to James Seyffart, an ETF analyst with Bloomberg Intelligence. It seems as if investors have mostly stayed the course with Cathie and Ark, but it doesn't seem like many people are piling in yet.

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Wood's other top performing ETFs in the quarter, including the Ark Next Generation Internet ETF (ARKW) and the ARK Fintech Innovation ETF (ARKF), were both negatively affected by outflows. 

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This quarter saw Bitcoin gain 70%, and a fund tied to the asset class, the ProShares Bitcoin Strategy ETF (BITO), also gained 70%. This fund had $35 million in net inflows in the quarter, making it one of the biggest winners of the quarter for the asset class. 

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In some cases, investors without a long-term view have been whipsawed when they tried to time certain sector exposures. “The nice thing about ETFs is that they allow you to pivot quickly when volatile conditions occur. That can be beneficial and detrimental, depending on your perspective,” Edmondson added.

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