Best Performing ETFs in 2022

2022 was a very tough year for investors, both big and small. All three of the major indexes ended the year down substantially. The Dow Jones Industrial Average fell the least, just 8.8%. The S&P 500 dropped 19.4%, while the technology-heavy NASDAQ sank 33.1%.

2022 was the first year in four that the major industries ended the year lower. Inflation and aggressive interest rate hikes by the Federal Reserve to combat persistent inflation weighed on the market as a whole but had a more damaging effect on technology stocks.

Out of the top-performing Exchange Traded Funds in 2022, two of the top five were ETFs that are short technology stocks, while two others were short Treasury Bonds.

It's not very often that the best performing Exchange Traded Funds are ones that had bet against an asset class or specific industries, but that was the type of year we had in 2022.

Let's look at the top five performing ETFs of the year and see what they had in common and if there is anything we can learn that will make us better investors in 2023 and beyond.

As mentioned, two of the top five best-performing ETFs were short, US Treasury bonds.

The best-performing ETF of 2022 was ProShares UltraPro Short 20+ Year Treasury (TTT) which rose 150.17%.

The third best-performing ETF was the ProShares UltraShort 20+ Year Treasury ETF (TBT), which increased by 93.29%.

Both funds were "short" or betting that they would decline in value, Treasury bonds that have 20 or more years until maturity.

The TTT was leveraged three times short Treasury bills. That means if a Treasury bill fell $1 and the TTT triple short leveraged fund had bet against it, TTT would be up $3. So for every $1 move lower Treasury bonds went, TTT was moving $3 higher.

The TBT fund was also short-leveraged, but it was only short two times. So if it were short a bond that fell $1, it would go higher by $2, not $3 like TTT. This also means that TBT carried lower risk than TTT, and still performed well in 2022.

The second-best-performing ETF of 2022 was the ProShares Ultra Oil & Gas ETF (DIG).

DIG invests in large-cap US-based oil & gas companies, and it is another leveraged fund. However, DIG is positively leveraged twice instead of inverse or short, like TTT and TBT. That means if the oil & gas companies' DIG tracks move higher by $1, DIG goes ups $2.

Oil & Gas companies had a solid 2022 as oil demand which had fallen off during the early days of the pandemic, continued to rebound, and the conflict between Russia and Ukraine has strained the oil & gas industry.

The fourth and fifth best-performing ETFs of 2022 were both short technology.

The ProShares UltraPro Short QQQ ETF (SQQQ) and the ProShares UltraShort QQQ (QID) ended 2022 up 82.36% and 66.29%, respectively.

Like TTT and TBT, SQQQ is a three-times leveraged short ETF, and QID is a two-times leveraged short ETF. SQQQ tracks, well, shorts the popular QQQ ETF.

The QQQ ETF is the Invesco QQQ Trust (QQQ) which tracks a modified cap-weighted index of the top 100 NASDAQ listed stocks. Most investors use the QQQ ETF to get a good picture of the technology industry in addition to the NASDAQ index itself.

Technology stocks, especially the market leaders, obviously did not have a good 2022. And therefore, two ETFs that short just the top 100 technology stocks reaped the benefits.

It is easy to see how a leveraged ETF can easily beat a standard, non-leveraged ETF regarding total returns.

However, investors need to remember a few things. Leveraged means more risk. Things are great when three times, short-leveraged ETF goes in the direction you want.

But, if it reverses on you, that leveraged acts against you three times as strong. While leverage can help you make money two or three times as fast, it can take it away twice as quickly.

Leverage also means contango. If you don't know what contango is, know that any leveraged fund must spend money daily to gain its leverage. That daily cost will eat away at profits or compound loss if the fund has already gone against you.

This is why all leveraged funds come with a disclaimer that they will provide two or three times leveraged daily. Any holding period of more than one day will be subject to contango.

I believe there is an argument to be made that the technology stocks and the Treasury bond ETFs could continue to fall in 2023, making TTT, TBT, SQQQ, and QID again winners this year.

But I am not sure the oil & gas companies can or will continue to rally, just because the price of oil & gas running higher in 2022 was a big driver in that sector performing well. I don't see other catalysts that will push oil prices above $5 a gallon in 2023, but I could be wrong.

2022 was a challenging year in general, but remember, even when the markets are red, there is always a bull market somewhere.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.