After picking up significantly in the final quarter of last year, Vanguard has predicted that increased flows into fixed income ETFs will persist over the coming year.
Flows into global bond ETFs surged from $50 million in Q3 to $492 million in Q4, according to data released by the ASX and Vanguard. Meanwhile, on an annual basis, domestic bond ETFs saw the biggest growth in flows last year, jumping 65 per cent to $2.8 billion.
“We saw the beginning of increased demand for fixed income ETFs in late 2022 and expect investor interest to grow as this new year unfolds,” commented Vanguard’s head of ETF capital markets, Asia-Pacific, Minh Tieu.
“The unusual correlation we saw between bonds and equities in 2022 is also set to end, delivering greater diversification benefits to balanced portfolio holders. On this note, last year we saw a lot of commentary about the death of the 60/40 portfolio and this year, likely to see a flip in sentiment declaring its resurgence as bond returns turn positive.”
Mr Tieu indicated that Vanguard’s return expectations for fixed income have grown significantly compared to a year ago in light of higher interest rates and an improved market outlook.
Over the next decade, global bonds are now expected to return 3.9 to 4.9 per cent and domestic bonds 3.7 to 4.7 per cent, 2 percentage points higher than previously forecast by the firm.
“While we’ve maintained that history has proven the worth of balanced portfolios no matter the market conditions, the key takeaway for investors here is that sticking with a diversified asset allocation and avoiding the urge to time the market is the best way to achieve long-term investment success, no matter which asset class is predicted to outperform,” Mr Tieu noted.
Turning to equity markets, Vanguard reported that international share ETFs suffered a 59 per cent drop in flows in Q4 to $334 million. Annually, flows were down 81 per cent to $14.1 billion.
Australian shares ETFs fared better, with $816 million in flows during Q4 compared to $805 million in Q3 and a smaller annual fall in flows from $5.7 billion in 2021 to $4.4 billion in 2022.
“Equity markets in 2022 were plagued by economic and geopolitical events significant enough to unsettle even the most seasoned investor, and this was reflected unsurprisingly in last year’s global equity ETF flows,” said Mr Tieu.
“Looking ahead, Vanguard’s outlook for global equities, including emerging markets, is improving as they near fair value. This is encouraging news for investors as lower valuations are generally more conducive to higher long-term returns.”
Vanguard has put the risk of a recession in Australia in 2023 at 40 per cent, which the firm said was notably lower than the 90 per cent chance for a recession in the US, UK and Europe.
“Investors who are coming into the new year with concerns about recession might find solace in knowing that broadly diversified ETFs have proved resilient even in the face of economic uncertainty,” Mr Tieu suggested.
“The diversification and liquidity benefits of broadly diversified ETFs mean they’re inherently lower risk when compared to other investment products, such as individual shares or thematic and complex ETFs.”
