Adam DeSanctis

ASX-listed exchange traded funds (ETFs) attracted a record $33.49 billion of investors’ cash inflows in 2024, smashing the previous $23.6 billion post-COVID full-year inflows record set in 2021.

The record inflows, coupled with strong growth on global equities and bond markets, saw the Australian ETF industry’s total assets under management soar 38% to $239.09 billion, a rise of $66.2 billion from the $172.87 billion total reached at the end of 2023.

Vanguard attracted a record $9.5 billion of cash inflows during 2024, further cementing its place as Australia’s largest ETFs assets manager.

“2024 was a stellar year for the Australian ETFs industry, reflecting both the ongoing growth of this market segment in general terms and the strong returns from global investment markets over 2024,” said Adam DeSanctis, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“Low-cost index products, which hold over 80% of the Australian industry’s assets, continued to capture most investor inflows despite the proliferation of new active ETF products.

“Some of the key highlights over 2024 were the large investor cash flows into international equity ETFs, primarily index-tracking funds, which at a record $17 billion represented around half of the ETF industry’s total inflows last year.

“So it’s very clear that more Australian investors than ever before are using ETFs to access offshore markets. For example, Vanguard’s MSCI Index International Shares ETF (VGS) attracted close to $2 billion in investor cash flows last year, which helped to lift its total assets under management to almost $10 billion.

“Australian equity ETFs also attracted robust investor inflows of around $7.8 billion over 2024, demonstrating that investors still see a strong benefit in having a home-market exposure.”

The Vanguard Australian Shares Index ETF (VAS), which invests in the top 300 companies on the ASX, remained Australia’s largest ETF after its assets under management increased by more than $3 billion over the course of 2024 to $17.8 billion.

“Another highlight last year was the solid inflows into bond ETFs,” said Mr DeSanctis. “With interest rates set to remain higher for longer, we don’t expect that trend to change over the medium term.”

Over the 2024 year Australian fixed income ETFs attracted $4.4 billion in investor inflows, while international fixed income ETFs recorded additional inflows of $1.2 billion.

“What’s most important for all ETF investors to remember is that the strong market returns from the past few years are not an indicator of future performance, which is why having a long-term focus and diversification across different investment markets and asset classes is imperative,” said Mr DeSanctis.

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Adam DeSanctis

Robust investor cash flows over the September quarter, most notably into international equity index-tracking ETFs, helped to lift the Australian ETFs industry’s assets under management to a new record high of $219.5 billion.

The value of Australia’s ETFs industry has risen by more than $46.6 billion since the start of this year, fuelled by the combination of strong investor inflows and global share market gains.

ASX and Vanguard data shows investor cash flows into Australian ETFs on a year-to-date basis have totalled $23.3 billion, including more than $12.7 billion over the September quarter. This compared with $5.38 billion of investor inflows over the June quarter and $5.28 billion over the March quarter.

ASX-listed international equity ETFs, primarily index-tracking funds, have accounted for more than 56% of total inflows this year as investors continue to target the strong growth experienced on U.S. share markets and, to a lesser extent, other offshore markets.

A further $7.7 billion of investor cash flows were directed into international equity ETFs over the September quarter, bringing the total amount invested in this segment during the nine months to 30 September to over $13 billion.

By comparison, around $2.09 billion flowed into Australian equity ETFs over the third quarter. This added to the $1.47 billion invested into this segment over the June quarter and the $1.48 billion over the March quarter.

“The appetite for international equity ETFs by investors is not subsiding and continues to outpace the inflows into Australian equity ETFs and other industry segments,” said Adam DeSanctis, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“For Australian ETF investors, who now number over 2.2 million, the best investment strategy over 2024 and beyond is to focus on long-term investment growth while staying diversified across different markets and segments.

“Beyond diversification and ease of trading, which are the biggest motivations for investors choosing to use ETFs, a high percentage of investors see ETFs as the quickest and lowest-cost way to access different types of asset classes and offshore markets.”

Meanwhile, inflows into Australian fixed income ETFs accelerated over the third quarter as investors targeted bond funds to lock in relatively higher income levels.

A total of $1.49 billion was directed into Australian fixed income assets over three months to 30 September, up from $601 million over the June quarter and $694 million over the March quarter. Inflows into international fixed income ETFs totalled $446 million compared with $286 million over the June quarter and $108 million over the March quarter.

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Adam DeSanctis

Australian ETF assets under management surged around 15% over the first half of 2024 to a new record high of more than $200 billion as at 30 June following solid gains on global equity markets and strong investor inflows.

This compared with total Australian ETF assets on the Australian Securities Exchange (ASX) and the Cboe Australia exchange of around $178 billion at the start of 2024. There are around $4.8 billion of ETF assets listed on the Cboe Australia exchange.

Data released by the ASX and Vanguard shows Australian ETF assets rose by around $25 billion from the start of January to the end of June, with total ETF investor cash inflows on the ASX of $10.67 billion.

Inflows into ASX-listed international equity ETFs totalled $5.28 billion (49% of inflows), while Australian equity ETFs attracted $2.95 billion of investor capital over the half. This represented 27% of total ETF inflows.

The overall pace of ETF inflows maintained momentum over the three months to 30 June. Following total inflows of $5.28 billion over the March quarter, investors added a further $5.38 billion to ASX-listed ETFs over the June quarter.

“The strong inflows into international equity ETFs evident over the March quarter accelerated during the June quarter, reflecting the eagerness of many Australian investors to capture the robust growth that has occurred on U.S. share markets and other offshore markets,” said Adam DeSanctis, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“At the same time the investor inflows into Australian equity ETFs remained resilient, reflecting the positive performance of the broader domestic share market over the first half of the year.”

The Vanguard Australian Shares Index ETF (VAS), which invests in the top 300 stocks on the ASX, attracted $573 million of inflows over the first half and remained the biggest ASX-listed ETF with more than $15.3 billion of assets under management.

Another key theme over the first half of 2024 was the surge in listings of active ETF and managed fund products. Out of 41 new ASX ETF listings in total, 28 of them (68%) were actively managed funds.

“The number of new funds listing on the ASX has been accelerating, and most of these have been niche investment products underpinned by complex trading strategies, sometimes through the use of debt and synthetic financial instruments.” Mr DeSanctis said.

“What’s clear is that the ETFs industry is continuing to evolve, which is why the Australian Securities and Investments Commission (ASIC) has just introduced new ETF product labelling guidelines to reduce confusion and assist investors in understanding the risks associated with different types of ETF products.”

Fixed income inflows stabilise

Inflows into fixed income ETFs totalled $1.69 billion over the first half, which compared with total fixed income inflows of $1.74 billion over the first half of 2023.

Australian fixed income ETFs recorded inflows of $1.29 billion over the half, while international fixed income ETFs received inflows of $394 million.

“Vanguard’s global expectations for higher bond returns over the longer term have not changed, which aligns with our view that central bank interest rates are likely to remain elevated over the medium term,” Mr DeSanctis said. “So, we expect ongoing interest in fixed income from investors seeking to tap into those higher rates via ETFs that primarily invest in investment grade government bond issues.”

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Adam DeSanctis

Australian investors added A$2.65 billion into ETFs that invest on international equity markets over the three months to 31 March 2024, according to data released by the Australian Securities Exchange (ASX) and Vanguard.

The inflows into international equity ETFs represented 50% of the total inflows into the Australian ETFs industry over the first quarter.

Meanwhile Australian equity ETFs attracted just under A$1.5 billion of investor capital over the quarter, representing 28% of total ETF inflows.

The Australian ETFs industry had A$191.87 billion in total assets under management at the end of March, over A$53 billion more than at the end of the 2023 March quarter.

“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,” said Adam DeSanctis, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“US share markets surged around 24% last year and continued to gain ground over the first quarter, reaching record highs, mainly thanks to the impressive returns from some of the big US technology stocks. It’s no surprise that many Australian investors have been using international ETFs that are 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 in mindset 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 A$5.30 billion of inflows in 2023, more than double the A$2.20 billion invested into international equity ETFs.”

Still, in a major milestone, the Vanguard Australian Shares Index ETF (VAS) became the first Australian ETF to have over A$15 billion in assets under management, cementing its long-standing position as Australia’s largest and most popular ETF.^[1]

Bond ETF inflows recede

After record investment inflows into bond ETFs in 2023, total inflows into the fixed interest ETF category declined over the March quarter from the levels recorded in Q4 2023.

Australian fixed interest ETFs recorded inflows of A$694 million compared with A$764 million in the three months to 31 December 2023, while international fixed income ETFs received inflows of A$108 million compared with A$401 million over the previous quarter.

“The strong inflows into fixed interest ETFs that we witnessed last year reflected global expectations for higher bond returns over the longer term,” said Mr DeSanctis. “Those expectations haven’t changed, but it’s evident from the latest quarterly inflows that there is a strong focus on equity markets, particularly international markets.”

———

Notes:
[1] Based on funds under management as at 31 March 2024.

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A well-diversified portfolio should include both domestic and international investments.

Australian investors flocked to bond ETFs in 2023 as rising interest rates made fixed income allocations more attractive, according to data recently released by the Australian Securities Exchange (ASX) and Vanguard.

Australian bond ETFs received A$3.81 billion in cash flows in 2023, a 37% improvement year on year. Global bond ETFs also attracted A$1.5 billion over the year.

“Although we expect central banks to cut interest rates in the second half of 2024, we’re unlikely to see the “zero-rate era” return any time soon. This means rates are likely to stay relatively higher for longer and are expected to settle in the 3%-4% range in Australia,” said Adam DeSanctis, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“While higher interest rates for longer might be painful for borrowers, they’re actually a good thing for investors over the long run, particularly for bond investors. We therefore anticipate bond ETFs to remain popular with Australian investors in the coming year, particularly as domestic bond return expectations have substantially increased since 2022 from 1.3-2.3% to 4.3-5.3% per annum over the next 10 years.

“Hopefully stabilising interest rates this year will also improve investor sentiment and we’re confident growth in the Australian ETF industry will continue”.

Home bias prevalent despite improved returns from global equities

Broad index ETFs that invest in the largest ASX-listed companies attracted the biggest share of equity inflows in 2023 despite the Australian share market recording a substantially lower return than most international share markets. On the whole, Australian equity ETFs attracted A$5.3 billion, up 20% since 2022.

The Vanguard Australian Shares Index ETF (VAS) again was the most popular domestic equity ETF in Australia, recording nearly 11% of net market flow.

Interestingly, despite strong gains recorded in global equity markets, the asset class still received less inflow than its domestic counterpart, recording A$2.2 billion compared to the A$5.3 billion Australian equities attracted.

“It’s clear Aussie investors still favour Aussie equities, perhaps in part due to the familiarity of domestic companies or the view that offshore investments might be riskier. This kind of home bias however can be costly, particularly as 2023 saw very strong returns from global equities. Investors who weren’t invested or had cashed out in 2022 when global equity returns fell therefore missed out on this extraordinary rebound opportunity,” said Mr DeSanctis.

“A well-diversified portfolio should include both domestic and international investments as these different asset classes will respond differently to the same market forces. This is essential to managing investment risks and portfolio volatility”.

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Australian equity ETFs attracted A$1.85 billion in cash flows, up 105% since Q2. The Vanguard Australian Shares Index ETF (VAS), which provides exposure to the top 300 companies listed on the ASX, recorded a cash flow of A$613 million, representing approximately 33% of total domestic equity ETF flows in Q3. This followed Vanguard’s reduction of the headline fee for VAS early in the quarter.

Flows into international equity ETFs also picked up in Q3 with A$845 million but still trailed flows into domestic equities despite strong performance in global equity markets.

Fixed income remained in favour with investors in Q3, with domestic bond ETFs recording A$1.3 billion inflows in Q3 (up nearly 6% since Q2) and global bond ETFs recording A$396 million (up 26% since Q2).

“Stronger flows into equity ETFs in Q3 suggests investor confidence is returning, likely a result of stabilising interest rates over the last few months in Australia,” said Adam DeSanctis, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“That being said, markets are often navigating uncertainty so it’s important for investors to maintain a long-term perspective. Market volatility due to further rate changes, or heightened sell-offs due to geopolitical unrest, are usually short-lived, while long-term market performance remains resilient.

“Fixed income markets remain robust. While there has been downward pressure on bond prices in the near term, the silver lining is that bonds are expected to produce higher returns over the long term for investors with a sufficient investment horizon. Also, investors who have been impacted by recent sell-offs can reinvest in bonds with higher coupon payments given interest rates are likely to stay higher for longer.

“Interestingly, despite the pickup in equity flows, fixed income flows did not drop in Q3 – an encouraging sign that investors are also diversifying their portfolios and finding merit in a balanced asset allocation that includes both shares and bonds, and not simply fleeing to cash (the value of which erodes with inflation)”.

ETF growth continues

The Australian ETF industry continues to grow year on year despite global market and economic uncertainty, recording A$153 billion in AUM as at the end of September 2023.

The last 10 years has seen AUM increase almost 18-fold, growing from A$8.9 billion in AUM in September 2013.

There are now also more than 300 ETF products listed on the market.

“ETF awareness and uptake, particularly amongst retail investors in recent years, has grown exponentially and is now the investment of choice for many. This is particularly true for broadly diversified ETFs such as VAS, which, despite the rapid increase in thematic products, remains favoured by investors on the whole,” said Mr DeSanctis.

“At Vanguard, we continuously assess ways in which we can refine our product offering to make ETFs more accessible to everyday investors. This past quarter, we reduced the management fee for VAS from 0.10% p.a. to 0.07% p.a., and earlier this year, for VAF from 0.15% to 0.10% to help investors keep more of their returns and achieve their long-term investment goals”.

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Duncan Burns

Fixed income ETFs attracted the most cash flow of any asset class in the first half of 2023, according to data recently released by the ASX and Vanguard.

Australian bond ETFs received A$1.74 billion in H1 (Q1: A$499 million, Q2: A$1.24 billion), up 54 per cent since H1 2022.

International bond ETFs received A$763 million in H1 (Q1: A$448 million, Q2: A$315), up more than twofold (215 per cent) since H1 2022.

Collectively, net flows into Australian and global fixed income ETF products totalled A$2.5 billion over the first half of the year, outpacing net flows into Australian and international equity ETF products which recorded approximately $1billion over the same period.

“Although rising interest rates have created short-term pain for Australian investors, they have helped to improve long-term return expectations for bonds,” said Duncan Burns, Vanguard’s Head of Investments, Asia Pacific.

“While bond prices typically reprice lower when interest rates rise, investors with a sufficient long-term investment horizon will ultimately be better off.

“Investors are also flocking to bonds in their search for diversification and income as yields continue to stabilise (a signal that investors are becoming more optimistic), presenting an attractive alternative to holding cash which has generally underperformed bonds post rate hike cycles.

“Interestingly, despite the strong first half rally in global equity markets, demand for domestic fixed income – particularly bonds with high investment grade credit ratings – were the clear winner”.

The Vanguard Australian Shares High Yield ETF (VHY) was Vanguard’s most popular product in H1, attracting A$302 million in flows.

With $45 billion in assets under management for Australian investors, Vanguard remains the largest ETF issuer on the market.

ETF uptake continues to grow

The Australian ETF market continued to grow in H1, recording A$146 billion in AUM as at the end of June 2023, up 20 per cent year on year.

According to ASX’s 2023 Investor Study, ETFs are “one of the most affordable ways to enter the investment market and diversify holdings”, with 20 per cent of all Australian investors owning an ETF (up from 15 per cent in 2020).

“ETFs have so many in-built benefits that can make investing simpler and more cost effective for all types of investors,” said Mr Burns.

“For example, less than half of Australian investors believe they hold a diversified portfolio, with many not knowing what investments to select nor how to achieve adequate diversification. This is where ETFs can step in and play a critical role.

“The inherent diversification benefits of ETFs – where one trade can provide investors with exposure to not only hundreds of securities, but also to different markets and asset classes – reduces the need for investors to pick and choose winning stocks, and the costs that goes with buying individual securities.

“Education remains a focus for the ETF industry to help boost investor confidence but it’s encouraging to see ETFs growing in popularity amongst retail investors in particular”.

New Head of ETF Capital Markets

Vanguard has appointed Adam DeSanctis as Head of ETF Capital Markets for the Asia Pacific region.

Adam joined Vanguard in 2015 and was most recently a specialist in the U.S. ETF Capital Markets team. Adam holds an MBA from Columbia Business School and a B.A. in Economics from Wesleyan University. He is a CFA Charterholder and a member of the CFA Society of Philadelphia.

Reflecting Vanguard’s rotational culture for developing leadership expertise, Minh Tieu, previous Head of ETF Capital Markets, has moved to Vanguard’s headquarters in Malvern, PA to assume the role of Head of U.S. Equity Operational Risk.

“We are delighted to welcome Adam to the Australian investment management team and the wealth of experience he brings, and wish Minh every success as he embarks on his new role in our US business”, said Mr Burns.

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