In a quarter marked by increasing interest rates, rising inflation and weaker economic growth, investors are allocating more of their funds to safer havens such as bonds.
Australian bond ETFs received A$905 million in inflows, up 12 per cent since Q2. Global bond ETFs also received A$50 million in Q3, a reversal from Q2 when it experienced negative flows of A$36 million.
Domestic equity ETFs on the other hand received A$805 million in inflows, down 53 per cent from Q2. Conversely, international equity ETFs received A$814 million in inflows, up 66 per cent from Q2.
The Australian ETF market also expanded in Q3, recording A$121 billion in AUM as at September end. This is an increase of A$2.4 billion or 2 per cent from Q2, despite falling asset values.
Even with the continued market turbulence, inflows into Vanguard ETFs maintained momentum, recording A$2.07 billion in Q3, in line with the A$2.08 billion recorded in Q2. Vanguard continues to be the largest ETF provider in Australia, and the Vanguard Australian Shares Index ETF (VAS) continues to be the most popular ETF in the market.
“Investors have been tested by the unusual positive correlation between bonds and equities this year but there’s good indication that this lockstep is ending. Bonds will continue to be an effective portfolio diversifier and resume their role as a long-term source of income given the rise in interest rates,” said Minh Tieu, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.
“While you can’t escape talk of recession, the best thing investors can do at present is to tune out the noise and focus on meaningful portfolio diversification. Financial markets are forward-looking and have likely already priced in the threat of recession so there’s little value in attempting to time markets based on daily commentary”.
Diversified ETFs: popular in times of uncertainty
Inflows into diversified/multi-asset ETFs increased in Q3, recording A$228 million (up 16 per cent since Q2).
“There’s been steady interest in diversified ETFs this quarter, an all-in-one solution for investors who want broad diversification across asset classes and regions tailored to their risk profile. This is consistent with what we typically see – a surge in diversified ETF flows when markets are particularly volatile as investor confidence drops in selecting individual investments,” said Mr Tieu.
“Diversification is therefore a good tonic for uncertainty. Our long-term outlook for fixed income and equity markets has improved, and if history is any indication, investors who own a balanced portfolio may be rewarded for their patience in due course”.