FI ETF inflows outpace equities in H1

Fixed income (FI) exchange traded funds (ETFs) have attracted more cash flow than any other asset class in the first six months, according to data from the Australian Securities Exchange (ASX) and Vanguard.

During the first half of 2023, Australian bond ETFs posted a 54% growth, compared to the same time a year before, and received $1.74 billion. At the same time, international bond ETFs attracted $763 million which translated into a twofold growth (215%) since H1 2022.

This means that collectively net flows into Australian and global fixed income ETF products totalled $2.5 billion over the first half of the year, outpacing net flows into both Australian and international equity ETF products which recorded around $1 billion.

Duncan Burns, Vanguard’s Head of Investments, Asia Pacific said that investors were flocking to bonds in their search for diversification and income as yields continued to stabilise, signalling investors were becoming more optimistic.

“Although rising interest rates have created short-term pain for Australian investors, they have helped to improve long-term return expectations for bonds,” he said.

“While bond prices typically reprice lower when interest rates rise, investors with a sufficient long-term investment horizon will ultimately be better off.

“Interestingly, despite the strong first half rally in global equity markets, demand for domestic fixed income – particularly bonds with high investment grade credit ratings – were the clear winner”.

Also, the Australian ETF market continued to grow in H1, recording $146 billion in AUM as at the end of June 2023, up 20% year on year.

“ETFs have so many in-built benefits that can make investing simpler and more cost effective for all types of investors,” Burns added.

“For example, less than half of Australian investors believe they hold a diversified portfolio, with many not knowing what investments to select nor how to achieve adequate diversification. This is where ETFs can step in and play a critical role.

“The inherent diversification benefits of ETFs – where one trade can provide investors with exposure to not only hundreds of securities, but also to different markets and asset classes – reduces the need for investors to pick and choose winning stocks, and the costs that goes with buying individual securities.