Investors favour broadly diversified ETFs as market volatility continues

Minh Tieu

Australian ETF net inflows remain positive despite a volatile quarter, albeit falling 34 per cent to A$3.1 billion in Q2, according to data recently released by the ASX and Vanguard.

Of these flows, Vanguard received the majority with A$2.1 billion, on par with Q1 despite a decrease in overall industry flows. Vanguard’s Australian Shares Index ETF (VAS) alone accounts for almost one third of industry flows, recording $972 million. Vanguard continues to be the largest ETF issuer in the market.

Compared to Q1 2022, industry AUM dropped almost 10 per cent from A$132 billion to A$119 billion as inflation and interest rate uncertainty continue to dampen returns.

“The fall in industry AUM is no surprise given the level of volatility plaguing global markets this year, but we’re encouraged to see net inflows are still positive – a sign that most investors are still relatively undeterred and remain focused on their long-term goals,” said Minh Tieu, Vanguard Australia’s Head of ETF Capital Markets, Asia-Pacific.

During the volatile quarter, investors also displayed a clear preference for broad market ETFs, as evidenced by the overwhelming popularity of VAS.

“Diversification is the single best defence investors can employ when it comes to navigating market volatility. Broad-based ETFs make for a solid portfolio core as they provide investors instant exposure to hundreds of securities, reducing the reliance on the performance of any one company or trend.

“Some thematic and exotic ETFs on the other hand are novel and narrow in nature and as we’ve seen this year, fare significantly worse when volatility really hits. Investors must understand the risks of thematic and exotic ETFs and their underlying exposures before they invest in the hype,” said Mr Tieu.

Resurgence in Australian fixed income

Australian fixed income ETFs saw a resurgence amidst rising interest rates in Q2, recording A$806 million in inflows, a 148 per cent increase from Q1.

Cash ETFs continued to see outflows in Q2 with -A$313 million (Q1: -A$555 million) as investors seek higher returns in other fixed income products.

Global fixed income ETFs too saw outflows with -A$36 million (Q1: A$278 million).

“This past quarter has seen much debate about the merit of bond allocations, but investors will do well to recognise joint declines in equity and bonds are rare and typically brief. The diversification benefits of bonds in the long-run will still outweigh any short-term downturns,” said Mr Tieu.

“An uptick in fixed income flows suggest investors are also capitalising on the higher yields to be delivered by newer bonds as a result of recent rate hikes – a welcome boost for those retired or approaching retirement”.

Flight back to domestic equities

Australian equity ETFs also saw a significant uptick with A$1.7 billion in inflows in Q2, up 57 per cent quarter on quarter.

Conversely, international equity ETF flows weakened, attracting A$489 million, down 70 per cent quarter on quarter.

“Australian equities saw significant demand this quarter as investors flocked back to familiar names. However, it’s a timely reminder that diversification not only across asset classes but regions too is important – no one country is free of economic or market risk, and there’s opportunity for investors to mitigate divergences in global economic momentum through international securities,” said Mr Tieu.

Australian ETF market net cash flow by asset class (Q2 2022 v Q1 2022)

Top 5 Vanguard Australia ETFs by cash flow (Q2 2022)