Promising ETF Sectors in the Second Half of 2022

In the first half of this year, the US stock market suffered its worst performance in 52 years due to factors such as interest rate hikes, high inflation, and the Russian-Ukrainian war. As more investors start paying attention to the US stock market ETFs, some are hoping to make their asset allocation more diversified. In addition, some wish to find anti-inflation, more stable, and highly liquid assets to hedge their risks.

On June 28, the China Securities Regulatory Commission (CSRC) and the China Securities and Futures Commission (CSRC) of Hong Kong issued an announcement approving the formal inclusion of eligible ETFs in the mainland and Hong Kong stock market trading interconnection mechanisms. As a result, interconnected ETF trading will begin on July 4, 2022. All Hong Kong and overseas investors, including institutional and individual investors, would then be eligible to trade SSE-listed ETFs under the SSE Stock Connect and suitable SZSE-listed ETFs under the SZSE.

The US stock market has experienced a downward trend for over half a year. However, the flow of capital into ETFs has not cooled, especially since investors in reverse ETFs have reaped massive returns. According to the statistics collected by ETFGI, a British research institute, ETFs performed strongly in May, with net inflows of US$80.28 billion. The cumulative net inflow reached US$417.87 billion at the end of May, the second-highest in history, after only the US$572.36 billion recorded in the same period last year. Among them, the average daily turnover of the Hong Kong ETF market has risen to about US$1.1 billion this year, a record high.

Investors’ enthusiasm for ETFs has grown this year. But the selection of ETF assets in the first half and second half of the year may require some adjustments. Due to the outbreak of the war between Russia and Ukraine, energy supply shortages and other issues continue to push up energy prices. As a result, investors who held long positions in energy ETFs emerged as well-deserved winners in the first half of this year. This group of investors occupied almost half of the US stock ETFs growth list in the first half of 2022. In the S&P 500 index, the energy sector has become the only sector to close higher in the year’s first half.

Investors who invested in energy ETFs during the year’s first half made a lot of money, so the outlook for energy ETFs seems to be less stable. However, there is a risk that the oil and gas sectors, including coal and other energy stocks, could make up for the decline, especially recently after the international oil prices fell sharply. This reflects the market’s concerns about the global recession, which is believed could inhibit the demand for crude oil and fuel commodities.

At their latest meeting, OPEC+ recently confirmed that they would maintain the previously announced production quota adjustment plan. The cartel’s leaders decided to increase August’s crude oil production quota by 648,000 barrels daily, restoring nominal oil production to pre-epidemic levels. The news of the increased output led to a cooling in oil prices, coupled with Russia’s active search for alternative markets for its crude oil and gas. As a result, crude oil production in June is rising instead of falling. These factors may bring more volatility and uncertainty to the performance of energy ETFs in the year’s second half. As a result, investment risks will increase significantly compared to the year’s first half. Still, they may bring more significant opportunities for investors in reverse ETFs.

In the second half of this year, ETF investors can focus more on stock market areas with some certainty, in line with global development trends. The first batch of 8 carbon-neutral ETFs has significant potential and will be officially issued in early July this year. In addition, low-carbon, photovoltaic, energy storage, and other related industrial chains may usher in new opportunities in the year’s second half. Coupled with the historical performance of the low-carbon industry in the ETF market compared to the market benchmark, income growth is likely and suitable for long-term investors.

In addition, the Ministry of Industry and Information Technology and five other departments, which previously supported green intelligent home appliances in the countryside, have partnered together. As the pandemic situation in the mainland improves, electricity, home appliances, and other sectors may be boosted by government policies to stimulate residents’ willingness to consume. In addition, the concept of advocating for intelligent and green environmental protection also makes the prospects of new energy vehicles and the related battery industries generally optimistic about their market prospects. Investors should pay more attention to the performance of the sustainable car companies in the second half of the year since they tend to choose assets that match their needs. Investor behaviour is usually cautious when selecting stocks from the new energy sector, but these stocks have accumulated excessively in the year’s first half.

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