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Bond ETFs unlikely to dim in popularity in 2024: Vanguard

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By Rhea Nath
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3 minute read

The investment manager anticipates bond ETFs will continue to remain popular with domestic investors, after Australian bond ETFs recorded inflows of some $3.81 billion in 2023.

Rising interest rates in the last year have seen domestic investors dash to fixed income allocations, with Australian bond ETFs witnessing a 37 per cent improvement year on year in cash flow in 2023.

According to data released by the Australian Securities Exchange (ASX) and Vanguard, Australian bond ETFs and global bond ETFs received $3.81 billion and $1.5 billion, respectively, in cash flows in 2023.

Adam DeSanctis, head of ETF capital markets, Asia-Pacific at Vanguard, believes this is the likely outcome of a higher-for-longer interest rate environment, which is expected to settle at a range of 3–4 per cent in Australia.

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“While higher interest rates for longer might be painful for borrowers, they’re actually a good thing for investors over the long run, particularly for bond investors,” he said.

“We therefore anticipate bond ETFs to remain popular with Australian investors in the coming year, particularly as domestic bond return expectations have substantially increased since 2022 from 1.3–2.3 per cent to 4.3–5.3 per cent per annum over the next 10 years.”

Vanguard’s data also found a home bias was apparent in equities inflows, with Australian equity ETFs attracting $5.3 billion in 2023, growing 20 per cent since the previous year.

Broad index ETFs that invest in the largest ASX-listed companies attracted the biggest share of equity inflows and the Vanguard Australian Shares Index ETF was the most popular domestic equity ETF in Australia, recording nearly 11 per cent of net market flow.

In comparison, global equity ETFs recorded $2.2 billion in inflows although these markets recorded higher returns in the last year.

“It’s clear Aussie investors still favour Aussie equities, perhaps in part due to the familiarity of domestic companies or the view that offshore investments might be riskier.

“This kind of home bias however can be costly, particularly as 2023 saw very strong returns from global equities. Investors who weren’t invested or had cashed out in 2022 when global equity returns fell therefore missed out on this extraordinary rebound opportunity,” said Mr DeSanctis.

He highlighted the importance of a well-diversified portfolio with both domestic and international investments “as these different asset classes will respond differently to the same market forces”.

“This is essential to managing investment risks and portfolio volatility,” he said.

Bond ETFs unlikely to dim in popularity in 2024: Vanguard

The investment manager anticipates bond ETFs will continue to remain popular with domestic investors, after Australian bond ETFs recorded inflows of some $3.81 billion in 2023.

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