The stabilisation of interest rates, and a subsequent boost in investor sentiment, have helped put Aussie equities firmly “back in favour” among local investors, according to Vanguard.
Data from ASX and Vanguard showed that Australian equity ETFs received inflows of $1.85 billion over the third quarter of 2023, an increase of 105 per cent on the second quarter.
Inflows also increased to international equity ETFs between the two quarters but, at $845 million, trailed behind those observed for domestic equities.
“Stronger flows into equity ETFs in Q3 suggests investor confidence is returning, likely a result of stabilising interest rates over the last few months in Australia,” commented Adam DeSanctis, Vanguard’s head of ETF capital markets, Asia Pacific.
“That being said, markets are often navigating uncertainty so it’s important for investors to maintain a long-term perspective. Market volatility due to further rate changes, or heightened sell-offs due to geopolitical unrest, are usually short-lived, while long-term market performance remains resilient.”
Fixed income, which has been a significant area of focus for investors this year, also enjoyed higher inflows during the quarter, including a 6 per cent lift for domestic bond ETFs to $1.3 billion and a 26 per cent jump for global bond ETFs to $396 billion.
Mr DeSanctis suggested that fixed income markets appeared “robust”, but flagged downward pressure on bond prices as being a challenge in the short term.
“The silver lining is that bonds are expected to produce higher returns over the long term for investors with a sufficient investment horizon. Also, investors who have been impacted by recent sell-offs can reinvest in bonds with higher coupon payments given interest rates are likely to stay higher for longer,” he continued.
“Interestingly, despite the pickup in equity flows, fixed income flows did not drop in Q3 – an encouraging sign that investors are also diversifying their portfolios and finding merit in a balanced asset allocation that includes both shares and bonds, and not simply fleeing to cash (the value of which erodes with inflation).”
Looking at the Australian ETF industry more broadly, Vanguard reported that assets under management have increased almost by nearly 18 times over the past decade, growing from $8.9 billion in September 2013 to $153 billion in September 2023.
This growth, the investment firm noted, has been achieved despite the uncertainty that has gripped markets and economies globally in recent years.
“ETF awareness and uptake, particularly amongst retail investors in recent years, has grown exponentially and is now the investment of choice for many,” Mr DeSanctis said.
“This is particularly true for broadly diversified ETFs such as VAS, which, despite the rapid increase in thematic products, remains favoured by investors on the whole.”
VAS, which is Vanguard’s Australian Shares Index ETF, experienced a fee reduction earlier this year following similar reductions by BetaShares and BlackRock. According to Vanguard, VAS accounted for approximately one-third of all domestic ETF inflows during Q3.
