Ryan Jackson: Investors have continued to clamor for ETFs in 2023. Nine months into the year, U.S. ETFs pulled in roughly $323 billion of new money, a sum that would make Dr. Evil’s head spin.
But the ETF windfall has hardly been democratic. The 20 most popular gathered 62% of overall inflows this year, while the rest of the 3,000-plus ETFs duked it out for the remainder.
Today, I’ll spotlight three ETFs that are flying off the shelves in 2023 and break down the factors behind their successful campaigns.
3 Hottest-Selling ETFs
1) iShares 20+ Year Treasury Bond ETF TLT
2) JPMorgan Equity Premium Income ETF JEPI
3) Pacer U.S. Cash Cows 100 ETF COWZ
First up is iShares 20+ Year Treasury Bond ETF, ticker: TLT. It has been a tremendous year for this fund…but not for the investors that bought it. TLT ranked third among all ETFs with 17.2 billion dollars of inflows over the first three quarters, all while delivering a negative 9% return over the same span.
This index strategy offers a market-value weighted basket of U.S. Treasury bonds with at least 20 years until maturity. That long-term focus makes it very sensitive to fluctuations in interest rates. At the end of September, the portfolio’s effective duration was 16.3 years, meaning a 1% increase in yields would spark a 16.3% drawdown for the fund itself.
Investors have swarmed this fund to lock in attractive bond yields before the Fed reverses course and cuts interest rates. The problem is that many jumped on TLT too early, suffering losses as yields continued to climb. Investors that believe rates have finally peaked may find value in TLT now, but they should gear up for a bumpy ride that comes with long-duration portfolios.
JPMorgan Equity Premium Income ETF, which trades under the ticker JEPI, is perhaps the most successful ETF launch of all time. Since launching in May 2020, it has gathered nearly $31 billion of inflows and earned a Bronze Morningstar Medalist Rating.
JEPI is a covered-call strategy that offers a low-beta stock portfolio while selling one-month call options on the S&P 500. The proceeds from selling options generate excellent income for JEPI’s investors: It sported about a 10% yield as of September 2023. However, selling options also caps the fund’s upside during market rallies. Combining the options overlay and the low-beta equity portfolio makes this a very defensive strategy. It held up about 16 percentage points better than the Morningstar US Market Index in 2022 but trailed by about 9 percentage points for the year to date through September.
JEPI has become a hit because it provides two things that were hard to find in recent years: income and stability. But buy-and-hold investors should not expect this fund to produce the same long-term returns as traditional stock portfolios, and the income it generates is not particularly tax-efficient.
Rounding out today’s list is Pacer U.S. Cash Cows 100 ETF, ticker: COWZ. Over the 12 months through September, this fund collected nearly 7 billion dollars and roughly doubled in size due to inflows alone.
COWZ is more than just a clever ticker. This strategy screens the Russell 1000 Index for stocks with positive forecast free cash flows. It then sweeps in the 100 companies with the highest trailing 12-month free cash flow yield and weights them by that same measure. This approach gives the fund a rare and attractive blend of value and quality. It sits on the cheaper end of the mid-cap value category, yet it ranks well above most peers in profitability metrics like return on assets.
That blend has prompted excellent performance, and investors have taken note. COWZ ranked among the best 10% of mid-cap value funds over the one-, three-, and five-year periods through September 2023.
That said, this fund comes with risks. Energy stocks represent nearly one third of the portfolio, while financials, utilities, and real estate collectively account for just 2% of it. These sector bets have paid off for COWZ, but investors should beware of them before following the crowd into this strategy.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.