The exchange-traded fund train slowed a bit this year, but it’s not in danger of being derailed … at least not yet.

Low-cost, large-cap index funds continue to thrive within ETF Land despite this year’s equity meltdown. Other ETF investments have also performed well in terms of gathering assets, including certain parts of the fixed-income market. And there’s been a surge in interest in buffered strategies that protect investors against downside losses in their investments.

“Despite one of the most challenging market environments in recent memory, ETFs are on track to finish 2022 with their second-best year of inflows ever. I find that highly impressive,” said Nathan Geraci, president of the ETF Store Inc., speaking via email. He said the inflows are surpassing 2020’s total of more than $500 billion, but behind last year’s total of more than $900 billion. His RIA builds portfolios composed mainly of exchange-traded funds.

He noted that financial advisors are leaning much more heavily on ETFs for overall portfolio construction, and ETF issuers are responding with new, innovative ways to slice and dice markets. “ETFs were already mainstream tools for advisors, but 2022 feels like a tipping point where ETFs are now unquestionably the investment vehicle of the future,” Geraci said.

Tom Roseen, head of research services at Refinitiv Lipper, suggests that many investors are sticking with passive large-cap U.S. equity funds as a relatively safe place to stay invested in a stock market that has been anything but safe.

“I think people are in a risk-off mode and they want to get back into the market,” he says. “That’s why we’re seeing that S&P 500 index funds are at the top in attracting money. Short-duration U.S. Treasurys are also at the top. Equity income funds are big gainers because investors are trying to duck for cover and they need current income. They’re buying deeply discounted equities that haven’t been cutting their yields.”

Other market watchers also see a trend toward more conservative allocations. “Within equities there’s been a big rotation into low-volatility and dividend strategies and away from high-growth, high-beta strategies such as fintech, robotics and automation, and the metaverse,” says Aniket Ullal, vice president of ETF data and analytics at CFRA.

He notes that investors are increasingly turning to buffered, or defined-outcome ETFs that typically employ an options-based strategy designed to provide preset upside and downside return potential benchmarked to a specific index. Innovator Capital Management introduced the first structured products within the ETF wrapper four years ago, and has since built a sizable product lineup of buffered products. Other ETF providers have launched their own buffered products, and Ullal sees this trend continuing.

“Investors are looking for ways to stay invested while managing risk, and we think these type of structured outcome ETFs could gain,” he says. “There have been a lot of launches of these funds and more flows going into these products.”

Then there are those funds within the broadly defined environmental, social and governance space, which have taken heat from critics for a variety of reasons. Among them are complaints about the amorphous nature of what exactly “ESG” constitutes, along with claims by certain money managers and politicians that the ETFs in this space are tools used by the left to enforce its agenda on the investing public at the expense of corporate profits.

Despite that, ESG funds remain popular with many investors. “ESG, or responsible investing, saw inflows on the ETF side,” says Roseen. “Responsible investing has a stickiness. People are willing to invest where their morals are.”

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