Diversification across asset classes and sectors was found to be a hallmark of advised SMSF accounts.

A new report on investor trading trends reveals increasing differences in asset allocation between advised self-managed super funds (SMSFs), self-directed SMSFs and non-SMSF investors.

Diversification across asset classes and sectors was found to be a hallmark of advised SMSF accounts identified the SMSF Under Advice report, just released by wholesale trading platform AUSIEX, which provides trading solutions to over 4,400 investment advisers and 1,000 dealer groups across Australia.

“Advised SMSFs are more likely than self-directed SMSF to have holdings in passive ETFs, active ETFs, LICs, LITs hybrids and AREITs than self-directed SMSFs,” found the report.

Brett Grant, Head of Product, Customer Experience and Marketing at AUSIEX, says the report identifies “increasing allocation of advised SMSFs to exchange traded funds (ETFs) – in stark difference to self-directed SMSFs and non-SMSF retail accounts, both of which tend to prefer direct investments in equities”.

Mr Grant adds, “advised SMSFs also tend to be more diversified in terms of the number of unique securities held as well as sector allocations.  For example, advised SMSF accounts held 15 securities on average, in comparison to 12 for self-directed SMSFs.

“The extent to which financial advisers can add value to their clients’ portfolios throughout the market cycle was again evident in this year’s analysis,” he says.

Generational differences

The AUSIEX report also identifies differences between generations. “For instance, we found advised Generation X SMSFs allocated significantly more to healthcare stocks than their self-directed counterparts and less to industrials,” Mr Grant cites.

“Advised Millennial SMSFs also allocated significantly more than their self-directed SMSF counterparts to healthcare, as well as industrials, real estate and consumer discretionary stocks.”

Generation X and Millennials were also active on the new account front. The latter’s share of total new trading accounts jumped from 6.7% to 9.8% year-on-year as more people in this age group (29-44 years) reached the point at which they have sufficient assets to justify operating SMSFs.

The growing investing power of Millennials was also evident in the trading patterns of each generation. Millennials had the largest year-on-year increase in trading volumes (up 35.5%) among advised accounts in 2024, compared to Generation X (20%) and Baby Boomers (15%).

Mr Grants says, “it appears evident that younger SMSFs investors may have different trading preferences to their parents, not just because of their stage of life but also due to their familiarity with securities such as exchange traded funds and even cryptocurrency”.

Future investment trends

As for other asset classes, the report identified increased enthusiasm and traded value in cryptocurrency ETFs and crypto-infrastructure ETFs – which more than doubled (218%) across all SMSF accounts in the final quarter of the 2024 calendar year.

Mr Grant adds, “another asset allocation issue which will continue to attract significant industry attention going forward is the phasing out of bank hybrids following the announcement by the Australian Prudential Regulatory Authority (APRA).  It will be interesting to see what the investment industry produces as alternatives and what investors will shift towards – and we have already seen some product managers respond with an increase in fixed income ETFs.”
ESG differences

Advised SMSFs also appeared to find ESG characteristics more attractive than other investors, allocating almost 2.7% of their total exchange traded products (ETPs) portfolio value, compared to just over 2% for self-directed SMSFs.

What’s next?

Mr Grant suggests, “as we look ahead into the 2025 calendar year, a federal election, threatened trade tariffs, potential rate cuts and a record high S&P/ASXASX200 SMSF investors, advisers and trustees have much to grapple with.

“However, our analysis continues to paint a picture of advised SMSFs as well-diversified, active, agile and forward-looking investors, well-positioned to navigate challenging conditions and grow their wealth.”

“That said, advisers need to ensure their value proposition is well known and understood, especially considering our data found a year-on-year fall in the proportion of new advised Generation X accounts, when the broader trend – and that on the self-directed side is towards this generation growing in terms of its significance as a controller of overall wealth in the system.”

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The number of newly established SMSF trading accounts on the AUSIEX platform (across both advised and self-directed segments) rose 14.5% year on year in number.
Advised SMSFs drove most of this new account growth rising 12.3% year-on-year in overall account number. There was also a rebound in new self-directed SMSFs trading accounts from the prior year, up 19.8%.

Brett Grant, Head of Product, Customer Experience and Marketing at AUSIEX, says, “We’ve seen advised SMSF accounts grow in number last year, and continue to grow at the start of this year – and trading more actively.”

After a surge in interest in SMSFs among younger generations during COVID-19, Baby Boomers returned to make up a stronger proportion of new SMSF accounts, noted Mr Grant. Baby Boomers accounted for over 50% of new SMSFs accounts, both advised and self-directed.

There was also an increase from Millennial SMSF investors, up 9.8% year-on-year. This was mostly driven by male millennials. By contrast, there was a year-on-year decline in new Generation X female SMSF accounts.

On the self-directed side, Generation X increased its share of new accounts year-on-year, up to over 31%.

Victoria reported 24% in growth in the number of new SMSF accounts, up from 30% in 2023. New South Wales remained in second place marginally increasing its share from just under to just over 25% of new SMSF accounts. Queensland also increased its share to just over one in five new SMSF accounts.

“SMSFs traded more in 2024 than they did the previous year, up 7.5% (by number of trades) year on year, found the AUSIEX report. The increase we believe was in part due to increased additional interest in global equities, in particular global equity and US equity exchange traded funds (ETFs),” notes Mr Grant.

The value of holdings also increased more for advised SMSFs than for non-advised SMSF accounts. “These gains appear to have been supported significantly more diversified holdings, across sectors and securities,” says Mr Grant.

“This includes an increasing allocation to ETFs – which is a stark difference to non-SMSF accounts and self-directed SMSF accounts which prefer direct equities.”

“Despite concerns about the future of the wholesale investor test, the potential Division 296 superannuation tax, compliance requirements and cost of advice concerns, SMSFs remain in favour with distinct groups of investors and advisers who value greater flexibility when it comes to growing and protecting wealth.”

Read the report.

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Darren Rushworth

NICE (Nasdaq: NICE) has announced that AUSIEX has implemented the NICE CXone cloud-native contact centre platform to enhance its operational capabilities and customer engagement.

After a thorough discovery phase evaluating various providers, AUSIEX selected CXone for its comprehensive functionality and ease of integration.

Brett Grant, Head of Product, CX and Marketing at AUSIEX, said, “Adopting CXone has empowered AUSIEX to expand its customer interaction capabilities significantly. The company has moved from a primarily inbound call setup to a dynamic, AI driven omnichannel approach that includes webchat, and call-back features, enhancing both service levels and operational efficiency and flexibility.

“This transition has been a game-changer for the business that not only signifies a pivotal shift in AUSIEX’s technological infrastructure, but also aligns with the company’s strategic objective to provide superior service to and on behalf of our clients in an increasingly competitive market.”

One of the most significant upgrades has been in data analytics and reporting. AUSIEX has transitioned from relatively manually intensive processes to automated, real-time reporting and analytics through CXone. This has streamlined operations and provided deeper insights into customer behaviors and preferences.

Since the introduction of CXone, AUSIEX has also introduced additional touchpoints for customer feedback and engagement, including phone-based surveys, which has seen its customer engagement increase by 33 percent. These initiatives are part of AUSIEX’s broader strategy to harness technology for better customer insights and service delivery.

The CXone implementation has also delivered a strong foundation from which AUSIEX can continue to evolve its operations through continuous improvement and innovation, including through the planned integration of workforce management capabilities. As AUSIEX continues to navigate its growth trajectory and expand its service offerings, the successful integration of NICE CXone stands as a cornerstone of its commitment to excellence in customer service and innovation.

Darren Rushworth, President, NICE International, said, “NICE is thrilled to see the impact CXone has had on AUSIEX and its operations. NICE is dedicated to empowering innovative and customer-centric businesses like AUSIEX with cutting-edge solutions that position them at the forefront of innovation and CXone is specifically designed to meet the evolving expectations of customers in today’s dynamic market. With CXone, AUSIEX can enhance its customer engagement with an agile and responsive service that adapts to changing needs while ensuring consistent CX.”

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The AUSIEX International Markets offering delivers advisers the capability to trade 18 overseas markets, in a range of asset classes, with extensive trading toolkits and order types, online corporate actions management, integrated research, and powerful reporting features in one solution. Up to 10 currencies can be traded via multi-currency wallets for additional trading flexibility.

The offering complements AUSIEX’ existing Australian Shares trading platform, providing a single solution for advisers to trade both domestic and international equities online while also benefiting from our highly experienced local after-market service teams. International Markets accounts can be opened separately, or together with an Australian Shares account when accounts are originated online.

Brett Grant, Head of Product, CX and Marketing at AUSIEX, said: “Our new International Markets offering makes it easy for advisers, brokers and wealth management institutions, SMSFs trustees and other wholesale market participants to invest directly in more global assets to support the diversification of client portfolios. It provides access to not only a range of global equities, but also a wide range of exchange-traded funds (ETFs) not available in Australia.”

“This includes listed assets in 18 key markets, including the United States, Canada, Hong Kong and United Kingdom amongst others, across 10 currencies.”

Mr Grant noted: “More and more Australian advisers and their clients are interested in investing in global assets and this offering makes it easier for financial advisers to directly trade international equities, ETFs and global funds across multiple markets in multiple currencies.”

“Financial advisers, stockbrokers and their investor clients can also better monitor those assets through a range of real time information and reporting tools on a sophisticated and intuitive platform.”

Key features of the new AUSIEX International Markets offering provides advisers and their clients with:

• Multiple funding structures – ability to settle trades in 10 different currencies.
• Access to 18 markets  – throughout North America, Europe, and Asia.
• Multi-asset trading – multiple asset classes, including equities and ETFs and managed ETFs, as well as listed fixed income not available in Australia.
• Multiple order types – using simple and advanced order types.
• Extensive trading toolset – an expansive toolset for advisers and their clients including watchlists, screeners, alerts and charting tools.
• Integrated news and market research – accesses news and market analysis from multiple providers.
• Portfolio information and tools – via a configurable, modern interface.
• Reporting suite – providing an extensive library of reports.
• Online account opening – enables easy applications for an International Markets account and submitting a W8-BEN/E online.
• Corporate action management – manage voluntary corporate actions on the website.

The Australian share market represents less than 2% of the world’s investment by market capitalisation and the 7.7 million local investors who hold on-exchange are increasingly diversifying their portfolios by investing offshore.

“The ASX 2023 Australian Investor Study shows more Australians are investing directly in international shares than ever before,” added Mr Grant. “International equities are already the major single asset allocation for several big institutional investors, though allocations vary depending on their fund objective, risk tolerance and what they are seeking in terms of returns.”

AUSIEX plans to continue investing in enhancements to the offering, including additional market coverage and improved integration with its existing award-winning Australian share trading platform used by over 4,400 advisers from over 1,000 dealer groups across Australia to invest in equities, ETOs, ETFs, warrants, hybrids and IPOs.

AUSIEX is proud to be recognised within the industry through awards such as the 2022 Adviser’s Choice Award for Australian Shares at the SMSF Service Provider Awards, as well as Platform Provider of the Year at the 2021 SMSF Adviser Awards.

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The AUSIEX International Markets offering delivers advisers the capability to trade 18 overseas markets, in a range of asset classes, with extensive trading toolkits and order types, online corporate actions management, integrated research, and powerful reporting features in one solution. Up to 10 currencies can be traded via multi-currency wallets for additional trading flexibility.

The offering complements AUSIEX’ existing Australian Shares trading platform, providing a single solution for advisers to trade both domestic and international equities online while also benefiting from our highly experienced local after-market service teams. International Markets accounts can be opened separately, or together with an Australian Shares account when accounts are originated online.

Brett Grant, Head of Product, CX and Marketing at AUSIEX, said: “Our new International Markets offering makes it easy for advisers, brokers and wealth management institutions, SMSFs trustees and other wholesale market participants to invest directly in more global assets to support the diversification of client portfolios. It provides access to not only a range of global equities, but also a wide range of exchange-traded funds (ETFs) not available in Australia.”

“This includes listed assets in 18 key markets, including the United States, Canada, Hong Kong and United Kingdom amongst others, across 10 currencies.”

Mr Grant noted: “More and more Australian advisers and their clients are interested in investing in global assets and this offering makes it easier for financial advisers to directly trade international equities, ETFs and global funds across multiple markets in multiple currencies.”

“Financial advisers, stockbrokers and their investor clients can also better monitor those assets through a range of real time information and reporting tools on a sophisticated and intuitive platform.”

Key features of the new AUSIEX International Markets offering provides advisers and their clients with:

• Multiple funding structures – ability to settle trades in 10 different currencies.
• Access to 18 markets  – throughout North America, Europe, and Asia.
• Multi-asset trading – multiple asset classes, including equities and ETFs and managed ETFs, as well as listed fixed income not available in Australia.
• Multiple order types – using simple and advanced order types.
• Extensive trading toolset – an expansive toolset for advisers and their clients including watchlists, screeners, alerts and charting tools.
• Integrated news and market research – accesses news and market analysis from multiple providers.
• Portfolio information and tools – via a configurable, modern interface.
• Reporting suite – providing an extensive library of reports.
• Online account opening – enables easy applications for an International Markets account and submitting a W8-BEN/E online.
• Corporate action management – manage voluntary corporate actions on the website.

The Australian share market represents less than 2% of the world’s investment by market capitalisation and the 7.7 million local investors who hold on-exchange are increasingly diversifying their portfolios by investing offshore.

“The ASX 2023 Australian Investor Study shows more Australians are investing directly in international shares than ever before,” added Mr Grant. “International equities are already the major single asset allocation for several big institutional investors, though allocations vary depending on their fund objective, risk tolerance and what they are seeking in terms of returns.”

AUSIEX plans to continue investing in enhancements to the offering, including additional market coverage and improved integration with its existing award-winning Australian share trading platform used by over 4,400 advisers from over 1,000 dealer groups across Australia to invest in equities, ETOs, ETFs, warrants, hybrids and IPOs.

AUSIEX is proud to be recognised within the industry through awards such as the 2022 Adviser’s Choice Award for Australian Shares at the SMSF Service Provider Awards, as well as Platform Provider of the Year at the 2021 SMSF Adviser Awards.

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The S&P 500 and Nasdaq Composite Index each fell 3% in a single session as Australians slept, with market darlings such as Apple (AAPL), Alphabet (GOOGL) and Tesla (TSLA) all dropping sharply.

The volatility highlighted aspects of direct international trading that can be forgotten as advisers instead focus more on stock selection and asset allocation.

“Advisers should look at an international market intently before trading as there are differences in the way each exchange operates. The time difference with Australia is a crucial consideration for trading strategies,” said Brett Grant, Head of Product, Customer Experience and Marketing at AUSIEX.

Below are key factors that can make a noticeable difference to the net outcome from a direct global equities portfolio.

FX considerations

Currency movements are an obvious consideration at all times. Multi-currency wallets can help advisers manage currency risk for clients by allowing them to maintain cash holdings in chosen denominations over time.

“If an adviser establishes a multi-currency wallet, they can use it to fund purchases and to place the proceeds of any share sales. It means they don’t have to exchange currency every time they transact,” said Grant.

Dividends can also accumulate in the wallet, allowing advisers to be somewhat strategic in terms of precisely when to convert the foreign currency back into Australian dollars.

“You can actually make very distinct decisions around your FX transactions versus a combined share and FX transaction, with both having potential impact on returns” Grant said.

Investors who hold numerous wallets with different foreign currencies can also transfer cash between them after their initial purchase of foreign currency by using cross currency transactions.

Some platforms also send notifications to advisers using different wallets if there is a better currency to use for a specific transaction. The notification might simply say: “are you sure you want to use Hong Kong dollars for this transaction?”.

Risk management and trading efficiencies through modern trading tech

Unlike Australia, not all global exchanges operate continually through their trading day. Hong Kong’s HKEX, for instance, splits its daily trading into two sessions with a one hour break for lunch at 12 pm (HKT).

“Advisers should be mindful of when markets are open to avoid placing orders or price discovery at a sub-optimal time. This is particularly relevant for Asian markets as they trade mostly in our afternoon,” Grant said.

Conditional orders or other trading triggers can be used to manage the risks of large market moves that may occur when other markets are open.

Using the various trigger-based order types now commonly available can also deliver operating efficiencies for advisers, who don’t need to be working outside of domestic working hours to monitor price action and place trades.

“It’s possible for advisers to set triggers that generate a notification when a stock has moved by a certain amount. Or they can just automate trading – so if a client is holding Amazon and it goes down by 5% from a specified price, for example, it’s sold automatically. These ‘stop losses’ can trail as well, with the 5% stop tracking the current price, which can prevent unnecessarily deep losses where there is price growth” Grant said. “This type of execution risk management is really important for advisers and their clients to consider but can often be overlooked.”

Consider extra market-specific costs and administration

Each global market has different costs that should be on advisers’ radars. Canada, for example, charges brokerage on each share traded on a per cents basis. This is particularly pertinent to investors trading low value securities. For example, an order of 10,000 units of a penny dreadful would attract the charge on each of those units.

Other markets charge stamp duty. In the UK, for example, stamp duty may be applied on buy transactions at a rate of 0.5% of the transaction value.

Bureaucracy can also be a pain point for advisers to negotiate before trading international shares directly. It’s important for people to complete all relevant documentation in order to have the appropriate treaty tax rate applied for withholdings tax. The information collected via a W-8BEN form is crucial for US based transactions.

Know your market

Many parts of the world have more than one stock exchange, so advisers need to know if a broker provides access to those securities they wish to trade.

“There’s approximately 13 different exchanges in the US, as well as a number of different exchanges in Europe and the UK, and not all of them are readily accessible to Australian residents” Grant said. “There are also instruments listed in multiple places. Danish health company Novo Nordisk, which makes the highly publicised weight loss drugs Ozempic and Wegovy, is listed on Nasdaq Copenhagen (NOVO-B.CO) and on the New York Stock Exchange (NYSE: NVO) as American depositary receipts.

“The pricing may be slightly different for such companies and there may be an additional element of foreign exchange depending on the market in which an adviser chooses to transact.”

The overarching message is that advisers should step back and consider the nuances of each market in which they trade before implementing an international trading strategy.

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Nearly a third (30.9%) of buying volumes from advisers was directed to ETFs in 2023, according to figures just released by wholesale trading platform AUSIEX, up from a quarter in 2022.​

The figure was even higher for younger advised investors, with ETFs accounting for almost half (49.2%) of buy trades via advisers for those aged between 18-24. This was a 5% increase on 2022.

For those aged between 25-49, ETFs made up more than a quarter (24.7%) of the buying volumes from advisers in 2023, over the past two years.

Brett Grant, Head of Product, Marketing & Customer Experience at AUSIEX, said: “Over the past two years, ETFs have become an increasingly important part of advisers’ investment strategies, in part due to market uncertainty.

“Today, ETFs continue to offer a diversified, low-cost exposure to an index or specific thematic, allowing advisers and their clients to gain exposure to a range of asset classes in a single transaction,” he said.

“By taking advantage of ETFs, advisers can construct well-balanced portfolios tailored to the unique risk tolerance and financial goals of their clients.”

Mr Grant added: “They are also increasingly offering advisers new ways to engage with the next generation of investors, considering the types of exposures which can now be achieved with them and how they can be aligned to individual investor values.”

Three advantages of ETF investing for advisers

According to Mr Grant, ETFs are gaining popularity with advisers for several reasons:

1. Diversification: ETFs can be used to gain exposure to an array of asset classes, investment trends thematic and regions, helping to create instant diversification for investors.
2. Cost efficiency: ETFs are traditionally low cost compared with managed funds, offering value for clients.
3. Liquidity and transparency: ETFs trade on stock exchanges like individual stocks, providing intraday liquidity. Additionally, the transparent nature of ETF holdings allow advisers to make informed investment decisions.

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There is no right or wrong answer to the question of whether to hedge global equity portfolios.

The slide in the Australian dollar (A$) last year begs the question of whether it’s time to consider hedging global equity portfolios in anticipation of a potential rebound in the currency.

The recent drop meant a 100% hedged investment in the MSCI World ex Australia index fell 2.87% in the September quarter as global shares retreated, versus a more modest loss of 0.43% from an unhedged investment.

Some experts are forecasting the dollar will soon recover from its recent lows, which would potentially reverse those returns in favour of hedged investments.

In early October, NAB was forecasting the AUD/USD spot exchange rate will rise steadily from US64 cents in September to US73 cents by year-end and continue its upward trend into 2024. Westpac had a more conservative view, predicting the $A will reach US66 cents by December and not hit US70 cents until the end of 2024.

History though shows currency forecasting is inevitably fraught due to the wide range of variables that can alter the direction of an exchange rate, including geopolitical events, monetary policy decisions and an inflation outlook.

Take your pick

As a result of this unpredictability, many fund managers offer both unhedged and hedged versions of the same global equity funds forcing advisers and retail clients to choose a currency strategy that best suits their own outlook.

This dichotomy is evident in the Australian Exchange Traded Fund (ETF) market, where there is both an unhedged iShares S&P500 ETF (ASX: IVV) and a hedged version of the same fund (ASS: IHVV).

Likewise, there is both an unhedged version of Vanguard’s MSCI Index International Share ETF (ASX:VGS) and a hedged version (ASX:VGAD). Betashares also offer an unhedged option for its NASDAQ 100 ETF (NDQ), as well as a hedged option (ASX:HNDQ).

The returns of iShares two S&P500 ETFs show just how much volatility in the $A can impact returns. The unhedged version gained 13.82% in the three years to September 30, versus a 7.78% gain in the hedged product.

Diminishing difference

Over the long term though, the difference between hedged and unhedged portfolios may be less stark. Various research studies invariably suggest the difference between the two forms of investment is neutral over long periods.

Some pundits argue this makes currency hedging a more appropriate consideration for people with relatively short investment horizons, such as those close to retirement, while for others it’s a zero-sum game.

There is no right or wrong answer to the question of whether to hedge global equity portfolios; in fact, this is perhaps more so for this asset class than any other. It may all come down to individual circumstances and objectives just like all asset allocation decisions.

By Brett Grant, Head of Product, Marketing and Customer Experience

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A mixture of floating rate, government, corporate and composite Bond ETFs comprised the top 10 most bought fixed income securities. 

“Advisers report continued interest from their clients about opportunities in fixed income this year,” said Brett Grant, Head of Product, Marketing and Customer Experience at AUSIEX.

Mr Grant said: “Increased trading volumes highlight the potential opportunities that ETFs provide in a market like Australia that lacks a deep and easily accessible direct bond market for retail investors”. 

He noted that AUSIEX data, as at end February 2023, showed “Financial advisers accounted for a significantly higher proportion of total holdings value compared with self-directed investors.  Baby boomers showed by far the strongest preference for the asset class, followed by Generation X”. 

In terms of specific securities, Vanguard’s Australian Fixed Interest Index ETF (ASX: VAF) accounted for the lion’s share of total holdings value, followed by the same issuer’s International Fixed Interest Index (Hedged) ETF (ASX: VIF), I-Shares Core Composite Bond ETF (ASX: IAF) and Van Eck’s Australian Floating Rate ETF (ASX:FLOT), and BetaShares Australian Bank Senior Floating Rate Bond ETF (ASX:QPON).

Returns on fixed interest ETFs

AUSIEX data shows there are more than 20 ETFs listed on the ASX that give investors access to all quarters of the local fixed income market, including Australian government bonds, investment grade corporate bonds, inflation linked bonds, floating rate bonds and composite investments which combine different sections of the market.

Among the biggest products, the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) produced a 2.2% total return in the three months to January 3 2023, as did the iShares Core Composite Bond Exchange Trade Fund (ASX: IAF).

There are also more than a dozen global fixed interest ETFs on the ASX that allow investors to tap all areas of the international market, again ranging from conservative US treasuries to high yield bonds and ethically invested assets.

ASX listed fixed interest ETFs

• IAF: iShares Core Composite Bond ETF 
• VAF: Vanguard Australian Fixed Interest ETF 
• VGB: Vanguard Australian Government Bond Index ETF
• VCF: Vanguard International Credit Securities Index (Hedged) ETF 
• XARO: ActiveX Ardea Real Outcome Bond Fund (Managed Fund) 
• QPON: BetaShares Australian Bank Senior Floating Rate Bond ETF 
• VIF: Vanguard International Fixed Interest Index (Hedged) ETF 
• VBND: Vanguard Global Aggregate Bond Index (Hedged) ETF 
• IHCB: iShares Core Global Corporate Bond (AUD Hedged) ETF 
• GBND: BetaShares Sustainability Leaders Diversified Bond ETF – Currency Hedged

Source: ASX (February 6, 2023) 

New funds keep coming

Half a dozen new fixed interest ETFs were launched in 2022 as providers sought to broaden the scope of assets and investment philosophies available.

In the international space, the index-tracking Global X US Treasury Bond ETF (Currency Hedged) (ASX: USTB) was listed in July and is benchmarked against the iBoxx $ Treasuries Index (AUD Hedged). It provides exposure to US treasuries ranging from 1-year to 30-year maturities (and produced a total return of 4% in the three months to 3 February 2023).

There are also now several global fixed interest funds which use ESG principles following the listing of the iShares Global Aggregate Bond ESG (AUD Hedged) ETF (ASX: AESG) on the ASX in August. AESG produced a 3.24% total return in the three months to end January 2023 and tracks an index that measure the AUD hedged performance of global investment grade ESG screened bonds).

Mr Grant said several of the new products appeared to be part of a trend in which global investors were increasingly using ETFs to allocate capital to non-core sectors of the fixed interest market. 

In local fixed interest, Betashares launched an Australia Composite Bond ETF (ASX: OZBD) in February last year (2022) that tracks the Bloomberg Australian Enhanced Yield Composite Bond Index. This index takes an intelligent investment approach by weighting bonds on the basis of their risk-adjusted income potential rather than debt-weighting, aiming to provide investors with higher returns than the most commonly used Australian fixed income benchmark, the AusBond Composite Index which returned 3.4% after fees in the three months to the end of January 2023.

Mr Grant concluded: “For income-focussed advisers and investors there are plenty of heavily-traded options available via ETFs to gain diversified exposure to a range of both domestic and international asset types to maintain and protect income.  We may well see interest in these ETFs continue to rise.”

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There has been an increase in the trading capital notes on the Australian Securities Exchange (ASX), notes the country’s leading wholesale trading platform AUSIEX.

Capital notes fall into the broad category of hybrid securities, along with convertibles and preference shares. All three have been established, and traded, for several decades.

“AUSIEX data shows hybrids recorded the highest traded value in December 2022 since at least 2018, more than double that of the value in the previous December,” said Brett Grant Head of Product and Trading at AUSIEX.

Mr Grant said: “Financial advisers accounted for half of the demand, with much of the remainder being institutional investors. Trade volume among financial advisers increased 15.7% over the 2022 calendar year, compared with 2021.”

“Across generations, for advised accounts Gen X showed a significant lift in interest, with the proportion of trades increasing from 31% to 37.7%.”

Capital notes are debt securities that have equity-like features and pay franked dividends, thus their increasing attraction to those investors who like or require income.

“The fact they are issued by some of the bigger banks is also appealing to some investors who are looking for a diversification alternative to dividends,” noted Mr Grant.

Notes have been issued by a number of organisations in recent times including Commonwealth Bank (ASX: CBA), Macquarie Bank (ASX: MQG), ANZ Bank (ASX: ANZ), Insurance Australia Group (ASX: IAG), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB).

Capital notes are a type of unsecured debt a company takes to cover short-term liabilities. It is important to note that as the debt is unsecured, capital notes typically pay investors a higher interest rate, as they carry more risk than term deposits.  For example, hybrids generally rank behind other creditors if the company fails.

This debt is junior to secured notes, though they are monitored by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA).

Mr Grant added that while having the backing of well-established institutions, these investments were once considered too complex for most financial advisers’ clients. “But as the market and investing has become more challenging, there has been increasing interest from a range of investors.”

But with that increased return comes potential increased risks compared to a term deposit, though comparatively less risk than bank shares. 

Advisers note that capital notes are also a hedge against inflation as the yield increases and interest rates rise. But of course, seek or provide, professional financial advice with respect to investors’ individual requirements.

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