Australian ETF industry sees best quarter on record as investors tap into global equity markets

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The Australian ETF industry saw its strongest quarter on record with A$9 billion in cash flows, according to the latest figures released by the Australian Securities Exchange (ASX) and Vanguard.

Continuing to go from strength to strength, the industry also surpassed A$129 billion in AUM. Year on year, this represents a A$35 billion increase or 37 per cent industry growth.

Vanguard ETFs also saw record high quarterly cash flows of A$2.9 billion, A$757 million more than the previous best.

“It’s encouraging to see such uptake of ETFs. The inherent diversification benefits of ETFs coupled with their low-cost, easily-accessible nature makes them an increasingly popular investment option for both new and seasoned investors alike, and we’re pleased many are choosing to invest with Vanguard,” said Minh Tieu, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“If this momentum continues and we stay on the same growth trajectory as the last few years, we estimate the Australian ETF industry will reach the next A$100 billion of AUM in half the time it took to reach the first A$100 billion – which would be a remarkable feat”.

Tapping into global equity markets

Global equity ETFs also continued to be the product of choice for Australian investors, recording A$4.9 billion in inflows in Q3 2021 and A$10.9 billion YTD as at September 2021. This indicates almost 50 per cent growth year on year.

“With travel restrictions still in place, Australians are going overseas a little differently this year by pouring into ETFs that target exposure to international markets,” said Mr Tieu.

“Whether it’s because they’re optimistic about the global economic recovery or simply wanting to diversify away from home markets, more funds are flowing into international equity ETFs this year than into Australian equity ETFs”.

Notably, flows into Vanguard ETFs also switched from hedged equity ETFs into their unhedged counterparts. Vanguard’s unhedged international equity ETF (VGS) has attracted A$1 billion YTD compared to the A$313 million into Vanguard’s hedged international equity ETF (VGAD).

Mr Tieu comments: “The changing preference from hedged ETFs to unhedged ETFs is a possible indication that investors are anticipating a drop in the Australian dollar. If that’s the case, there may be some currency downsides for hedged investors should the Australian dollar depreciate.

“That being said, it’s extraordinarily difficult to predict currency rate movements and speculation is not encouraged. Vanguard research also shows currency movements generally have a neutral impact on returns over the longer term, so the decision to hedge or not to hedge should be most informed by an investor’s individual time frame and risk tolerance”.

Dive into diversifieds

Diversified or multi-asset ETFs continued to attract investor attention, recording a total of A$564 million in Q3 (Q2: A$400 million).

Vanguard’s Diversified High Growth ETF (VDHG) represented A$291 million of total multi-asset ETF flows in Q3, up from A$218 million in Q2 and A$172 million in Q1.

VDHG offers broad diversification across multiple asset classes, targeting 90 per cent allocation to growth asset classes and 10 per cent allocation to income asset classes. International equities represent over half of VDHG’s target allocation.

“Given investors’ bullish outlook on equities and the preference for international shares, it’s fitting that VDHG is currently the most popular ETF within Vanguard’s diversified suite,” said Mr Tieu. “It’s a sound product for investors who have a higher tolerance for risk, or younger investors with a longer time horizon looking for an all-in-one investment solution.“For more conservative investors or for those anticipating an end to the bull run on equities, a strategy to consider may be to direct new cashflows into the more conservative VDBA or VDCO, or rebalancing the portfolio into the more conservative diversified options depending on changes in their market outlook or risk tolerance”.

Bonds are still imperative

In the fixed income category, domestic bond ETFs (Q3: A$410 million) were preferred over international bond ETFs (Q3: A$366 million).

Looking closer, flows into Australian corporate bonds reached A$75 million in Q3, significantly surpassing government bonds which recorded a A$5 million outflow as low interest rates weigh heavy on the latter.

Despite low returns overall, bonds still play an essential role in helping to diversify a portfolio.

“Bonds will always be a worthy investment choice because of their ability to protect investors against downside risk. While nobody can accurately time the market, we know its cyclical nature means a slow-down in equity growth may one day come. This means investors who are not adequately diversified at that point in time may experience, sometimes significant, adverse movements in their portfolio value. Bonds however will cushion that fall, or at least reduce portfolio volatility,” said Mr Tieu.

“Vanguard has recently reduced fees on several of our Australian fixed interest funds so we can further support investors in constructing an effectively diversified portfolio that includes bonds as a defensive asset”.

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