U.S. Equity ETFs: The Best And Worst Of 2022

Summary

• This article summarizes the performance of the entire U.S. equity market by examining 1Y, 3Y, 5Y, and 10Y returns for 850+ ETFs across 40 categories.
• Major indices declined, but investing in Energy, High-Dividend, and Large-Cap Value ETFs softened the blow. Meanwhile, searching for the bottom in mega-cap growth and thematic ETFs didn't work.
• This article also features median fundamentals for each major category, including volatility, valuation, growth, and profitability statistics as of December 31, 2022.
• Markets still favor low-beta broad-based value ETFs with reasonable valuations. Profitability remains crucial, and I strongly recommend against speculating until market sentiment improves.
• Looking for a portfolio of ideas like this one? Members of Hoya Capital Income Builder get exclusive access to our subscriber-only portfolios. Learn More »

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Introduction

This article aims to summarize the 2022 performance of U.S. equities by analyzing the returns and structure of over 850 ETFs across 40 categories. Specifically, I want to inform readers of the factors that contributed to their ETFs' success or demise and whether they can expect these trends to continue in 2023. To begin, here are median return statistics for 26 categories, with sector-focused ones discussed shortly.

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Each section identifies the biggest winners and losers in each major category, highlighting the historical performance of hundreds of U.S. Equity ETFs. Throughout the article, I will refer to articles I've written covering these ETFs for context and will provide a list of links to follow in the conclusion. However, before we dive in, here are a few quick observations based on the data above:

1. Five-year returns from 2018-2022 were only a fraction of returns from 2013-2017 in all categories except commodities and risk management.

2. Thematic ETFs were among the worst performers in 2022, potentially illustrating the straightforward mean-reversion theory.

3. High-dividend ETFs were among the best performers, primarily due to high exposures to Energy stocks but also because of low valuations.

4. Low Volatility ETFs did a better job than in 2020. These ETFs have a tighter range of returns than your typical large-cap blend fund. The idea is that the less you lose in a drawdown, the less work you'll have to do to catch up.

5. Risk Management and Income Generation ETFs underperformed broad-market alternatives over each five-year period.

Let's get more into the specifics by starting with the biggest winners and losers among sector ETFs.

Sector Winners: Energy, Consumer Staples, Utilities

Energy, Consumer Staples, and Utilities ETFs achieved median returns of 58.08%, 1.01%, and 0.79% last year. Not bad, considering the SPDR S&P 500 ETF (SPY) lost 18.17%. If you accepted higher inflation early on and overweighted these sectors, you likely made out okay.

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The VanEck Vector Oil Services ETF (OIH) was the big winner, gaining 66.17%. I covered it in September 2021 with a primarily bearish tone, fearing the unpredictability of oil prices. Instead, I thought investors should diversify with broad-based sector ETFs. My recommendation lagged OIH by 2-4%. However, OIH's current five-year beta is 2.07 vs. 1.43 and 1.48 for XLE and VDE. From a risk management perspective, I'm still comfortable with my suggestion.

The table highlights how the top performers are market-cap-weighted funds. For example, XLE outperformed the Invesco S&P 500 Equal Weight Energy ETF (RYE) by 6.29%. Five- and ten-year returns suggest little value in the equal-weight approach among large-cap Energy stocks. VDE and FENY, which hold a small percentage of small- and mid-caps, slightly underperformed. In short, bigger was better. Investing in Energy doesn't have to be complicated.

Consumer Staples ETFs broke even for the year, performing as you'd expect in a bear market. However, the benchmark Consumer Staples Select Sector SPDR ETF (XLP) lost 0.83%, suggesting that here's an area where size diversification worked. RHS, the equal-weight version of XLP, gained 2.86% despite a 0.40% expense ratio. Investors who wanted more active management also succeeded with the Invesco Dynamic Food & Beverage ETF (PBJ). PBJ's Index reconstitutes quarterly, but I liked it all last year based on its fundamentals.

Finally, Utilities ETFs broke even, surprising many investors and fellow contributors. In March, I was bullish on XLU, the large-cap benchmark, after examining historical drawdowns, past relationships between yield spreads and XLU's excess returns, and the correlation between electric utilities' regulated returns and interest rates. In addition to a low beta, I viewed Utilities as an insurance play. Still, RYU, XLU's equal-weight counterpart, performed better with a 4.35% gain. These equal-weight ETFs are less popular because of their higher expense ratios, but there are benefits to moving away from the largest companies in uncertain markets.

Sector Losers: Communication Services, Technology, Consumer Discretionary

These three sectors were the worst performers in 2022; unfortunately, their weightings in the S&P 500 totaled 52% to begin the year. It's no wonder why the Invesco S&P 500 Equal Weight ETF (RSP) and the ALPS Equal Sector Weight ETF (EQL) outperformed SPY by 6.56% and 7.55%. Remember that performance is primarily linked to sector allocation decisions rather than stock picking within a sector.

The following table highlights the performance of all broad-based (not industry-specific) ETFs in these sectors. The ProShares S&P Technology Dividend Aristocrats ETF (TDV) was the lone highlight, losing 15.92%, but even that is poor compared to how a typical dividend ETF performed last year.

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The most popular Technology ETFs are the Technology Select Sector SPDR ETF (XLK) and the Vanguard Technology ETF (VGT), which lost 28-30% last year. The Invesco S&P SmallCap Technology ETF (PSCT) did better with a 22.50% loss, possibly indicating how much investors turned against big tech. Finally, numerous other weighting schemes used by ETFs like FXL and PTF didn't work. Among 480 U.S. Technology companies, only 56 were in the green last year, and apart from IBM (IBM) and Hewlett Packard Enterprise (HPE), you probably haven't heard of most of them.

Consumer Discretionary and Communication Services took a big hit last year primarily because of Alphabet (GOOGL, GOOG), Amazon (AMZN), Tesla (TSLA), and Meta Platforms (META). Losses were 39.09%, 49.50%, 65.03%, and 64.22%, respectively. As I noted in a recent article on the SPDR S&P 500 Value Index (SPYV), Amazon and Meta Platforms now form part of the Index, leading one reader to quip: "I'm sure Buffett is just around the corner."

Because these companies are so large, the only way around them is to buy individual stocks or alternatively-weighted ETFs like FXD or EWCO. Unfortunately, this means higher fees, which isn't a great long-term strategy. To illustrate, you'll lose approximately 8.67% of your gains to fees over ten years (assuming a 10% annual return) with a 0.60% expense ratio fund compared to 1.47% for a 0.10% expense ratio fund. That's a significant deficit to overcome, so investors need to consider how long they plan to hold an ETF before deciding.

Dividend Winners: High-Yield ETFs

After years of underperforming the market and being mocked for not investing in a straightforward S&P 500 Index fund, high-yield dividend investors finally had their year in the sun. The median loss for these 25 funds was just 1.68%, as detailed in the following table.

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The low-cost Vanguard High Dividend Yield ETF (VYM) and the Schwab U.S. Dividend Equity ETF (SCHD) are the most popular options. Since income is a key objective, fees come into play, which impacts net distributions. Looking through the list, HDV and SPYD are other lost-cost alternatives, but this year, the WisdomTree U.S. High Dividend Fund (DHS) took top honors. I recommended it in January 2022 after "really blasting" the fund the prior June, and the reason was simple: the annual reconstitution resulted in high allocations to Exxon Mobil (XOM) and Chevron (CVX).

The high correlation between XOM's annual excess returns and the average annual inflation rate was startling. I figured dividend funds like FDL and HDV with a similar composition would fare well. Now that inflation has likely peaked, it may be time to wind down the high Energy exposure, and that's why I'm keeping a close eye on reconstitutions this year.

One disappointment was the VictoryShares U.S. Income Volatility Weighted ETF (CDC), which lost 7.84%. I like CDC and have recommended it numerous times in the past. However, the latest reconstitution resulted in more volatility, and I also determined that its strategy of switching to Treasuries after market declines only works about half the time. These are reasons it underperformed VYM and SCHD by about 8-9% in Q4.

Finally, I want to touch on CSB and XSHD, two small-cap ETFs in this list. Using Seeking Alpha's Profitability Grades, I've calculated 5.48 and 5.24 profitability scores for these ETFs on a ten-point scale. For reference, most dividend ETFs have scores above 8/10, with VYM and SCHD scoring 9.19/10 and 9.35/10. For me, it's no surprise these funds did poorly. In bear markets, investors flock to safe stocks they know will be around no matter what. The fact that CSB and XSHB hold companies that pay a dividend doesn't change the fact that they aren't very profitable.

Dividend Losers: Volatile Tech-Focused ETFs

Last year, one of the worst-performing dividend ETFs was the First Trust Rising Dividend Achievers ETF (RDVY), losing 13.28%. RDVY has the seventh-best five-year returns behind SCHD, VSDA, VIG, LEAD, DGRW, and DGRO.

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Of course, many of these aren't real "losers," but think of them as just less successful as a group. WisdomTree Domestic Dividend ETFs (DLN, DTD, DON) performed well, but as discussed earlier, the small-cap dividend strategy followed by DES and DGRS didn't. VIG, an ETF with an excellent history, lost 9.81% and is one ETF I soured on in November 2021. Finally, NOBL did much better than I imagined, losing just 6.51%. I couldn't justify the valuation premium NOBL charges for 25+ years of consecutive dividend increases in previous reviews. However, these results suggest more than I figured, and I plan to reevaluate sometime this quarter.

Value Winners: Total, Large, and Mid-Caps

There are 54 ETFs with a total, large, or mid-cap value focus, but to maintain readability, I've only included returns for ones following a passive strategy with at least $125 million in assets under management, as follows.

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Vanguard's MGV and VTV, which track CRSP Indexes, had a strong year, losing 1.23% and 2.07%, respectively. So did the S&P 500 Value Index ETFs (SPYV, VOOV, and IVE). Throughout the year, these portfolios had five-year betas around 0.90. However, S&P Dow Jones Indices added stocks like Amazon and Meta Platforms to the Value Index, so you can expect the Indexes to diverge significantly in 2023.

RPV, RFV, and SPVU provide more "pure" or "enhanced" exposure to the value factor and typically trade at a 40-50% valuation discount compared to their broad-based counterparts. The trade-off is that they are usually much more volatile. These three ETFs currently have 1.19, 1.56, and 1.16 five-year betas, but the strategy worked in 2022. The key takeaway is that less-volatile, large-cap value works, and you can usually find a fund with a low expense ratio.

Value Losers: Small Caps

In January 2022, I wrote an article titled "VBR: Why Small-Cap Value Will Beat Growth In 2022". While I got the headline right, VBR still lost 9.36%, much worse than its large-cap counterparts. As shown below, small-cap value is an area where you should consider paying for active management.

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The Avantis U.S. Small Cap Value Fund (AVUV) lost just 4.90% last year and has the best three-return among peers. The Dimensional U.S. Targeted Value ETF (DFAT), another actively-managed ETF, was second-best, followed by Invesco S&P SmallCap 600 Pure Value ETF (RZV) which lagged slightly with a 6.81% loss. In contrast, the results were negative for VTWV and IWN, two ETFs tracking the Russell 2000 Value Index. As mentioned, the main culprit is likely poor profitability, and you get more of that with broader Indexes like the Russell 2000. To some extent, they are speculative products.

Blend Winners: Mid Caps

A surprise winner in the blend category was mid-cap ETFs, which averaged a median 13.37% loss. You might not consider this a win, but staying away from large caps proved wise. Some investors call mid-caps the "sweet spot" of U.S. equities, and while I don't share that view, there's no arguing against last year's success. Here's a performance summary for these 32 funds.

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One pattern is that high-fee ETFs did the best, so like small-caps, it may be an area where an alternative approach is practical. Investors should also remember that the selection universe for these funds can be quite different, so it's more challenging to make apples-to-apples comparisons. For example, ETFs like CZA, JPME, and VNMC currently have weighted-average market capitalizations of around $17-$18 billion. In contrast, S&P MidCap 400 ETFs range between $6-$7 billion. Therefore, some top performers likely borrowed from the success of large-cap ETFs.

Still, most S&P MidCap 400 funds declined by 11-13%, and the Invesco S&P MidCap 400 Revenue ETF (RWK) lost just 8.19%.

Blend Losers: Large Caps

My database has 134 large-cap blend ETFs, which is too many to squeeze into a single table. Therefore, I've included only the top 35 by assets under management. The median loss for the entire group last year was 17.59%.

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The Pacer U.S. Cash Cows 100 ETF (COWZ) was mentioned frequently by my readers this year, and it's no wonder. COWZ was the only large-cap blend ETF in this to break even this year. Two others not included above (BALT, EQRR) did slightly better, but that's it. I've covered COWZ before, and I am hesitant to recommend it because it will be slow to unwind the Energy stocks responsible for its recent success. There are easier ways to handle inflation, but if you want to learn more about its free-cash-flow approach, please click the link at the end of this article.

Turning to the more popular options, notice how the SPDR Dow Jones Industrial Average ETF (DIA) outperformed SPY by 11% last year. DIA is better balanced than SPY at the sector level, with larger allocations to defensive sectors like Consumer Staples and Health Care. XLG also overweights these sectors but has 36.37% exposure to Technology.

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Growth Winners: Small and Mid Caps

The best-performing growth ETFs were small- and mid-cap ones. ETFs tracking the S&P MidCap 400 and SmallCap 600 Growth Indexes (MDYG, IJK, IVOG, VIOG, SLYG, IJT) lost between 19-22% last year and have reasonable fees. In contrast, most actively-managed ETFs did poorly, throwing cold water on the concept that active management with lesser-known stocks is helpful.

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These results further reinforce the concept that investing based on profitability is crucial. Russell 2000 Growth Index ETFs (IWO, VTWG) lost about 7.50% more than S&P MidCap 400 Growth Index ETFs and have worse profitability scores (5.75/10 vs. 6.55/10). Small-cap growth investors should be careful with the minimum quality level they're willing to accept. Furthermore, valuation ratios by third-party providers are sometimes misleading as they exclude non-profitable stocks. Remember, you can't calculate a P/E with negative earnings, so it's essential to look closely at the details before buying.

Growth Losers: Large Caps

It will be a shocker to no one that large-cap growth ETFs were the biggest losers of 2022. Here's how some of the top holdings in the iShares Russell Top 200 Growth ETF (IWY) fared.

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The top five stocks, which made up 43% of the ETF in November, lost 41.63% on average. Therefore, only alternatively-weighted ETFs had much of a chance, which is evident when examining the results in the table below.

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The top eight follow a fundamental, multi-factor, tiered, or equal-weighting scheme, which was a straightforward way to avoid the mega-caps. The top performers were the Invesco S&P 500 GARP ETF (SPGP) and the SoFi Select 500 ETF (SFY). However, they aren't true growth ETFs. GARP combines the best attributes of growth and value strategies, while SFY follows a "growth-light" strategy, as I've documented several times.

Throughout the year, I've monitored expected growth rates and valuations for SPY and the Invesco QQQ ETF (QQQ), each time concluding that it didn't make sense to jump back into growth stocks. My analysis revealed a shrinking expected earnings growth gap between the two funds, even as SPY traded at a significant discount. To close the year, SPY and QQQ traded at 21.20x and 24.39x forward earnings with a 13.59% and 12.89% expected earnings growth rate, so QQQ is even behind on growth now, too. These statistics are why I hesitate to recommend any growth ETF right now.

Finally, like small- and mid-cap growth ETFs, active managers didn't add value to the category. FDG and FBCG lost 35.74% and 39.10% last year, and the ESG-themed LRGE fell 31.44%.

Other Winners: Low-Volatility ETFs

As mentioned in the introduction, low-volatility ETFs had a much better 2022 than in 2020. I recently covered the TrueShares Low Volatility Equity Income ETF (DIVZ). I may have the category wrong, as DIVZ's manager takes a high-dividend and low-volatility approach, but DIVZ was positive on the year. Other volatility-weighted ETFs like XRLV, SPLV, and VFMV lost about 5%, and the median decline for the category was only 9.42%. That loss was for the largest fund by assets: the iShares MSCI Minimum Volatility USA ETF (USMV).

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Other Losers: Thematic ETFs

I'm critical of most thematic ETFs because all they seem to do is neatly package up speculative stocks with little to no earnings by "theme" and charge unreasonably high fees. Thematic ETFs have a 0.59% average expense ratio, and they also lost 37.54% last year, with Cathie Wood's funds representing three of the bottom five spots on the list.

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Wrapping Up

This article demonstrated that although broad-based market ETFs fell, there were plenty of opportunities among high-dividend, large- and mid-cap value, mid-cap blend, low-volatility, and even some small-cap growth ETFs. Unfortunately, most own market-cap-weighted funds that overweight Technology, Communication Services, and Consumer Discretionary, the worst-performing sectors. Investors recognizing how richly-valued stocks were in trouble and that inflation wasn't going away turned to Energy, Consumer Staples, and Utilities.

In the following table, I've compiled a list of median fundamental statistics for several of the categories discussed today. Statistics are as of December 31.

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Here are five observations:

1. Dividend ETFs generally offer betas less than one, indicating less volatility than the overall market. Low-volatility, Consumer Staples, Health Care, Real Estate, and Utilities ETFs accomplish the same thing. I like sector ETFs because they offer a quick and easy way to change your portfolio's risk profile. Trading in and out of rules-based ETFs can be complex and costly.

2. Energy ETFs offer the best combination of earnings growth (44.92%) and forward earnings valuation (11.45x). Consumer Staples and Health Care look unattractive from a GARP perspective, but their low-volatility features are undoubtedly worth some premium.

3. There's a strong correlation between weighted-average market capitalization and profitability. Given the uncertainties, I'd stick with highly-profitable large-cap categories. There is too much junk and speculation among small-cap ETFs, even the value ones.

4. The mid-cap segment now offers the best growth opportunities, with a median 19.86% estimated earnings per share growth rate. On the other end are high-yield ETFs at 9.91%, which have average profitability scores. Strong profitability scores are why I favor ETFs like VYM and SCHD and prefer to stay clear of ultra-high-yielders like DIV. Often, prices are low for a reason.

5. The EPS Revision Score suggests Consumer Staples, Utilities, and Energy stocks have the best earnings momentum. You can monitor earnings surprises closely this quarter by following this link. Although these three sectors were solid, earnings surprises have trended downward for several quarters. A change in that trend could suggest a market bottom has occurred.

That's it for today! If you enjoyed this article, please click the links below to learn more about some of the ETFs discussed. Happy New Year, and I hope to continue the discussion in the comments section below.

• OIH: Oil Services Stocks Aren't Dead, But Now's The Time To Be Greedy
• XLU: Better Safe Than Sorry
• PBJ: Strong Earnings Momentum Will Carry This Consumer Staples ETF
• XLP: How This Consumer Staples ETF Stacks Up Against The Competition
• TDV: An Excellent Low-Volatility Addition
• DHS: 3.82% Yield After December Reconstitution, Still A Buy
• HDV: Yield Could Push 4%, But Energy Risks Are Now Too High
• SPHD: A 4.25% Yielding ETF With A Dividend Growth Problem
• VYM: Buy For The High Yield, But Consider These 3 Complementary ETFs
• SCHD: A Critical Factor-Based Rankings Analysis Vs. 100 Peers
• CDC: Did September's Reconstitution Benefit Shareholders?
• DLN: A Solid Single ETF Dividend Solution Yielding 2.50%
• DGRW: December Reconstitution Makes For An Unhappy New Year
• DGRO: An Annual Reconstitution Just In Time For Christmas
• VIG: A Critical Factor-Based Rankings Analysis Vs. 100 Peers
• RDVY: These Rising Dividend Achievers Are Too Risky
• RPV: Why I'm Downgrading The S&P 500 Pure Value ETF
• VTV: Is Value The New Growth?
• SPYV: How Microsoft And Amazon Changed The S&P 500 Value Index
• AVUV: This Small-Cap Value ETF Shines Bright
• VBR: Why Small-Cap Value Will Beat Growth In 2022
• COWZ: Time To Plan An Exit Strategy
• SPGP: Growth Estimates A Concern After Last Month's Reconstitution
• SFY: A Responsible Way To Re-Enter Growth Stocks
• QQQ: Still Too Pricey
• DIVZ: Checking In On This Top-Performing Dividend ETF
• USMV: The Low-Volatility Factor Is Too Costly Today
• ARKK: The Plot Thins

Disclosure: I/we have a beneficial long position in the shares of SPY, SCHD, CDC, MSFT, BRK.B, KO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.