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Fixed interest resurgence fuels ETF innovation, inflows

By Brett Grant
4 minute read

There was a 24.5 per cent increase in fixed interest ETF buy trades in the half year to end December 2022, according to data from the country’s leading wholesale trading platform, AUSIEX.

A mixture of floating rate, government, corporate, and composite bond ETFs comprised the top 10 most bought fixed income securities. 

Advisers report continued interest from their clients about opportunities in fixed income this year.

Bonds historically perform better in periods when share markets suffer losses, but the two asset classes declined in tandem last year as central banks pushed interest rates significantly higher to curb inflation. It was the first time since 1928 that both equities and fixed income dropped more than 10 per cent.

Expectations that central banks would ease rate hikes over 2023 are driving hopes that fixed interest will fare better this year and resume its position as the defensive element that offsets the volatility that is the norm for share market investments.

AUSIEX data, as at end February 2023, showed financial advisers accounted for a significantly higher proportion of total holdings value compared with self-directed investors. Baby boomers showed by far the strongest preference for the asset class, followed by Generation X. 

In terms of specific securities, Vanguard’s Australian Fixed Interest Index ETF (ASX: VAF) accounted for the lion’s share of total holdings value, followed by the same issuer’s International Fixed Interest Index (Hedged) ETF (ASX: VIF), iShares Core Composite Bond ETF (ASX: IAF) and VanEck’s Australian Floating Rate ETF (ASX:FLOT), and Betashares’ Australian Bank Senior Floating Rate Bond ETF (ASX: QPON).

Returns on fixed interest ETFs

AUSIEX data shows there are more than 20 ETFs listed on the ASX that give investors access to all quarters of the local fixed income market, including Australian government bonds, investment grade corporate bonds, inflation linked bonds, floating rate bonds, and composite investments which combine different sections of the market.

Among the biggest products, the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) produced a 2.2 per cent total return in the three months to 3 January 2023, as did the iShares Core Composite Bond Exchange Trade Fund (ASX: IAF).

There are also more than a dozen global fixed interest ETFs on the ASX that allow investors to tap all areas of the international market, again ranging from conservative US treasuries to high yield bonds and ethically invested assets.

New funds keep coming

Half a dozen new fixed interest ETFs were launched in 2022 as providers sought to broaden the scope of assets and investment philosophies available.

In the international space, the index-tracking Global X US Treasury Bond ETF (Currency Hedged) (ASX: USTB) was listed in July and is benchmarked against the iBoxx $ Treasuries Index (AUD Hedged). It provides exposure to US treasuries ranging from 1-year to 30-year maturities (and produced a total return of 4 per cent in the three months to 3 February 2023).

Now there are also several global fixed interest funds which use ESG principles following the listing of the iShares Global Aggregate Bond ESG (AUD Hedged) ETF (ASX: AESG) on the ASX in August. AESG produced a 3.24 per cent total return in the three months to end January 2023 and tracks an index that measures the AUD hedged performance of global investment grade ESG screened bonds.

Several of the new products appeared to be part of a trend in which global investors were increasingly using ETFs to allocate capital to non-core sectors of the fixed interest market. 

In local fixed interest, Betashares launched an Australia Composite Bond ETF (ASX: OZBD) in February last year (2022) that tracks the Bloomberg Australian Enhanced Yield Composite Bond Index. This index takes an intelligent investment approach by weighting bonds on the basis of their risk-adjusted income potential rather than debt-weighting, aiming to provide investors with higher returns than the most commonly used Australian fixed income benchmark, the AusBond Composite Index which returned 3.4 per cent after fees in the three months to the end of January 2023.

For income-focused advisers and investors, there are plenty of heavily-traded options available via ETFs to gain diversified exposure to a range of both domestic and international asset types to maintain and protect income.

Brett Grant, head of product, marketing and customer experience, AUSIEX