Fixed income ETFs investors’ new flavour

Yasmine Raso

Senior Journalist, Financial Newswire

19 April 2023

Fixed income has quickly risen through the ranks to become investors’ choice exchange traded fund (ETF) asset class, as inflationary pressure and recessionary threat push investors into defence mode.

According to data on Q1 2023 ETF trends released by the Australian Securities Exchange (ASX) and Vanguard, domestic bond and international bond ETF flows fell from Q4 in line with the wider market, but had seen year-on-year increases of 52 per cent and 61 per cent respectively.

This comes as domestic bond ETFs recorded AUD$499 million and international bond ETFs recorded AUDE$448 million in cash flows in the first quarter this year, dropping 32 per cent and nine per cent respectively from last quarter.

This comes as Vanguard’s own fixed income ETFs saw positive cash flows, with the Vanguard Australian Fixed Interest ETF (VAF) recording AUD$15.7 million.

“Q1 2023 has delivered the biggest quarterly return on Australian bonds for over a decade, and recent demand suggests fixed income is firmly back on investors’ radars,” Minh Tieu, Vanguard’s Head of ETF Capital Markets, Asia-Pacific, said.

“As bond markets are typically forward-looking, future interest rate hikes and inflation have likely already been priced in. This means bond allocations and the cost of diversification are now cheaper than seen for many years, with other benefits such as income on top.

“Vanguard has recently reduced the fee of the Vanguard Australian Fixed Interest Index ETF (VAF) to 0.10% after a periodic product review, with the objective of passing value back to our investors and helping them keep more of their returns.”

The wider Australian ETF market saw AUD$1.8 billion in cash flows in Q1 2023, a decrease of 47 per cent when compared to the previous quarter and 36 per cent from the previous year. Vanguard also echoed similar sentiments to Betashares’ Australian ETF Review March 2023, which found the rise in market assets under management to AUD$139 billion from Q4 2022 showed an “overall appreciation in the value of ETF assets”.

“Rising interest rates and the soaring cost of living has likely impacted ETF flows, as investors have less discretionary income with which to invest,” Tieu said.

“With recent financial market volatility and continuing economic uncertainty, it’s also likely investors are seeking safety in defensive assets such as fixed income and cash ETFs in an effort to manage investment risks.

“The softening of flows this quarter is understandable considering how stormy global markets have been, but we expect flows to pick up as inflation is brought back under control. Meanwhile, in this current weather, investors who focus on long-term returns, ensure broad portfolio diversification, and stay the course will be best prepared to navigate any market turbulence.”