investor daily logo

Global fundie bets on bond ETF endurance despite recent retreat

By Jessica Penny
4 minute read

Fixed income is expected to continue to drive the ETF industry despite a recent dip in inflows.

Australian fixed interest ETFs recorded inflows of $694 million in the three months to 31 March, compared with $764 million in the previous quarter, new figures from the ASX and Vanguard have shown.

International fixed income ETFs saw a more significant slowdown over the period, receiving inflows of $108 million compared to $401 million in the three preceding months.

Despite this retreat in bond ETF inflows, Adam DeSanctis, Vanguard’s APAC head of ETF capital markets, believes fixed income will remain a key driver of the ETF industry over the coming years as investors on the hunt for greater diversification add bond products into their portfolios.

“Global bond markets had a spectacular end to 2023, generating their best returns over a two-month period in November and December since the Global Financial Crisis,” DeSanctis told InvestorDaily.

“This jump in performance helped confirm the role of fixed income in investors’ portfolios, both as an income generator and as a potential capital appreciation vehicle.”

Vanguard maintains a positive view on the relative value of fixed income amid expectations interest rates will ultimately “settle at levels above those in recent memory”.

“Investors can capture durable, resilient yields, with the potential for additional price appreciation once interest rates begin to decline. We therefore anticipate bond ETFs to remain popular with Australian investors, particularly as our domestic bond return expectations have substantially increased since 2022,” said DeSanctis.

Expounding on the decline in fixed income ETF inflows, DeSanctis added that while global expectations for higher bond returns over the longer term haven’t changed, it’s “evident” that there is a strong focus on equity markets, particularly international markets.

Fixed income to close the gap

According to Tim Buckely, Vanguard’s international chief executive officer, the reason for this is the penetration of fixed income into the ETF structure is probably a decade behind equities.

“Old is new, if you will. Fixed income, one of the oldest asset classes out there, will drive the growth of ETFs in the next decade,” Buckley said in a recent report.

“Equity penetration to ETFs is 50 per cent more than that of fixed income, so we expect that in the next decade for fixed income to close that gap and make it into ETF form and into client portfolios,” he added.

Overall, Australian investors added $2.65 billion into ETFs that invest on international equity markets over the three months to 31 March – representing half of the total inflows into the Australian ETFs industry over that period.

Meanwhile, Australian equity ETFs attracted just under $1.5 billion of investor capital, representing 28 per cent of total inflows.

The local ETF industry had $191.87 billion in total assets under management at the end of March, over $53 billion more than at the end of March 2023.

“Australian investors have steadily been lifting their exposure to international equity ETFs listed on the ASX in a bid to capture the strong returns we’ve seen on offshore markets,” DeSanctis said.

He added that with US share markets reaching record highs last year on the back of impressive returns from technology stocks, it’s “no surprise” that many Australian investors have been using international ETFs listed on the ASX to get “a slice of that action”.

“As well as investing in ETFs that purely focus on US equities, a large amount of Australian investors’ capital has also been channelled into ETFs that have broader international equity exposures incorporating stocks in the US, Europe, Asia, and other regions.”

This shift to international equity ETFs saw lower inflows into Australian equity ETFs over the March quarter compared with the last three months of 2023.

“But, to put that into perspective, keep in mind that Australian equity ETFs still attracted $5.3 billion of inflows in 2023, more than double the $2.2 billion invested into international equity ETFs,” DeSanctis concluded.