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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Minh Tieu

Challenging market and economic conditions dampened ETF cash flows in Q1 2023, but industry AUM continues to grow year on year, according to data recently released by the ASX and Vanguard.

The Australian ETF market recorded A$1.8 billion in cash flows during Q1 2023, down 47% from the previous quarter, and compared to A$2.8 billion in Q1 2022.

Market AUM however has increased from A$130 billion at the end of Q4 2022 to A$139 billion at the end of Q1 2023, reflecting an overall appreciation in the value of ETF assets.

“Rising interest rates and the soaring cost of living has likely impacted ETF flows, as investors have less discretionary income with which to invest,” said Minh Tieu, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“With recent financial market volatility and continuing economic uncertainty, it’s also likely investors are seeking safety in defensive assets such as fixed income and cash ETFs in an effort to manage investment risks”.

“The softening of flows this quarter is understandable considering how stormy global markets have been, but we expect flows to pick up as inflation is brought back under control. Meanwhile, in this current weather, investors who focus on long-term returns, ensure broad portfolio diversification, and stay the course will be best prepared to navigate any market turbulence”.

Cash ETFs recorded A$430 million in Q1 2023, up significantly when compared to the same time last year when Cash ETFs recorded outflows of -A$555 million in Q1 2022. This suggests investors are seeking not only yield but also more liquidity than some current term deposits.

Focus on fixed income

Domestic bond ETFs recorded A$499 million in cash flows in Q1 2023 while international bond ETFs recorded A$448 million, down 32% and 9% respectively since Q4 2022. Although flows are down quarter on quarter, fixed income ETF flows are up significantly year on year with domestic bond ETFs up 52% and international bond ETFs up 61%.

Vanguard recorded positive cash flows across all fixed income ETFs, with Vanguard Australian Fixed Interest Index ETF (VAF) attracting A$15.7 million.

“Q1 2023 has delivered the biggest quarterly return on Australian bonds for over a decade, and recent demand suggests fixed income is firmly back on investors’ radars,” said Mr Tieu.

“As bond markets are typically forward-looking, future interest rate hikes and inflation have likely already been priced in. This means bond allocations and the cost of diversification are now cheaper than seen for many years, with other benefits such as income on top.

“Vanguard has recently reduced the fee of the Vanguard Australian Fixed Interest Index ETF (VAF) to 0.10% after a periodic product review, with the objective of passing value back to our investors and helping them keep more of their returns”.

The search for yield

Equity ETF flows also slowed in Q1 2023, with Australian equity ETFs receiving A$667 million in inflows and global equity ETFs seeing outflows of -A$113 million, down 18% and 134% respectively quarter on quarter.

Notably however, high yield Australian equity ETFs proved attractive in Q1 2023. Vanguard’s Australian Shares High Yield ETF (VHY) recorded A$183 million in flows and was Vanguard’s most popular ETF this quarter.

“It seems evident that investors are seeking out income sources which may account for the stronger flows into bond ETFs and high yield ETFs,” said Mr Tieu.

“For retirees in particular, income producing bond ETFs can be a source of steady income while providing diversification and a lower risk way to remain invested through the current market volatility”.

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Despite challenging conditions last year, ETFs still recorded $12.8 billion in cash flows. Vanguard accounted for 60 per cent of these flows and recorded its second-best year on record in terms of cash flows ($7.7 billion). Vanguard remains the largest ETF issuer in Australia and the Vanguard Australian Shares Index ETF (VAS) remains the most popular ETF.

Brighter days ahead for bonds

Flows into fixed income ETFs picked up significantly in late 2022, particularly into global bond ETFs (Q4: $492 million, Q3: $50 million).

Year on year however, domestic bond ETFs saw the highest increase in cash flows with 65 per cent, recording $2.8 billion in 2022 compared to $1.7 billion in 2021.

“In 2023, our return expectations for fixed income have significantly increased compared to a year ago. Thanks to higher starting interest rates as a result of central banks around the world working to quell persistent inflation, we forecast global bonds to return 3.9-4.9 per cent and domestic bonds to return 3.7-4.7 per cent over the next decade, a 2-percentage point increase,” said Minh Tieu, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

“We saw the beginning of increased demand for fixed income ETFs in late 2022 and expect investor interest to grow as this new year unfolds.

“The unusual correlation we saw between bonds and equities in 2022 is also set to end, delivering greater diversification benefits to balanced portfolio holders. On this note, last year we saw a lot of commentary about the death of the 60/40 portfolio and this year, likely to see a flip in sentiment declaring its resurgence as bond returns turn positive.

“While we’ve maintained that history has proven the worth of balanced portfolios no matter the market conditions, the key takeaway for investors here is that sticking with a diversified asset allocation and avoiding the urge to time the market is the best way to achieve long-term investment success, no matter which asset class is predicted to outperform”.

Global equities nearing fair value, outlook improving

International shares ETFs recorded $334 million in cash flows in Q4, down 59 per cent since Q3. Year on year, flows have dropped by 81 per cent (2022: $2.5 billion, 2021: $14.1 billion).

Flows into Australian shares ETFs remained steady, recording $816 million in Q4 (Q3: $805 million) and overall, experienced a smaller fall year on year than global equities (2022: $4.4 billion, 2021: $5.7 billion).

“Equity markets in 2022 were plagued by economic and geopolitical events significant enough to unsettle even the most seasoned investor, and this was reflected unsurprisingly in last year’s global equity ETF flows,” said Mr Tieu.

“Looking ahead, Vanguard’s outlook for global equities, including emerging markets, is improving as they near fair value. This is encouraging news for investors as lower valuations are generally more conducive to higher long-term returns.

“China’s reopening is also likely to buoy emerging market economies in Asia, although we forecast a notable divergence in emerging market growth as economies in Europe continue to battle inflation pressures and energy supply issues.

“ETF investors wondering where they should invest next should first and foremost consider their long-term goals, timeframe, and risk tolerance. Market outlooks are useful to consider but they shouldn’t dramatically alter asset allocations; what they should do is help set realistic expectations and encourage healthy portfolio diversification”.

History has proven ETFs to be resilient even in the face of recession

According to Vanguard’s 2023 economic and market outlook, there’s a 40 per cent chance of recession in Australia, notably lower than the 90 per cent odds placed on the U.S., U.K., and Euro area.

“Investors who are coming into the new year with concerns about recession might find solace in knowing that broadly diversified ETFs have proved resilient even in the face of economic uncertainty,” said Mr Tieu.

“The diversification and liquidity benefits of broadly diversified ETFs mean they’re inherently lower risk when compared to other investment products, such as individual shares or thematic and complex ETFs”.

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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”.

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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)

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Australian ETFs recorded A$132 billion in AUM in Q1 2022 (Q1 2021: A$102 billion, Q1 2020: A$57 billion).

Compared to the previous quarter however, market AUM decreased by A$2 billion (Q4 2021: A$134 billion) as events such as the Ukraine war and changes to US monetary policy dampened investor confidence.

Despite this, Vanguard experienced its third best quarter on record, receiving A$2.2 billion in inflows in Q1 2022, accounting for 46.4 per cent of the market. Vanguard also received the most cash flow of any Australian issuer in March.

“Market conditions are challenging right now, but we’re pleased to see investors are still choosing to invest with Vanguard and using ETFs to build or complement their portfolios,” said Minh Tieu, Head of ETF Capital Markets Asia-Pacific and Investment Strategy Group.

“Vanguard has long advocated that in times of heightened volatility, the best thing investors can do is to simply stay the course. As history has proven, significantly altering asset allocations or cashing out in response to short-term events will exclude investors from fully participating in the inevitable market recovery”.

Despite global volatility, investors still favour international equities

As in 2021, investors continued to direct flows into global equity ETFs, recording A$1.6 billion in Q1 2022. Domestic equities also saw A$1.1 billion in inflows.

While equities were still the most popular asset class amongst Australian investors, flows into global equities decreased by approximately 48 per cent and domestic equities by 50 per cent when compared to the previous quarter.

“Understandably, the uncertainty surrounding the Ukraine war and the ongoing economic impacts of COVID-19 are weighing heavy on investors’ minds. That being said, we’re still seeing resilient market flows and, according to data from our Personal Investor platform^[1], Vanguard investors in particular are not letting global volatility deter them from investing regularly and according to plan,” said Mr Tieu.

Vanguard’s Australian Shares Index ETF (VAS) was the most popular product in Q1 2022, recording A$731 million in inflows. VAS now has an AUM of A$11 billion, having grown 41 per cent year on year (Q1 2021: A$7.8 billion).

Flows into Vanguard’s Global Value Equity Active ETF also increased since last quarter, recording A$228 million in Q1. This may suggest value stocks are experiencing a resurgence over growth as investors prioritise income and stability.

Rising rates on investors’ minds

Flows into fixed income ETFs decreased in Q1 2022 compared to the previous quarter, with cash ETFs in particular experiencing A$555 million in outflows.

Australian fixed income ETFs recorded A$325 million, down 44 per cent since Q4 2021 but still approximately 15 per cent more than global fixed income ETFs, which received A$278 million in Q1 2022.

“With inflation rising and interest rates in Australia and the U.S expected to increase in the coming months, there’s been less demand for fixed income products across the board,” said Mr Tieu.

“Although tightening monetary policy and rising rates will generally mean a fall in bond prices, there is a silver lining for investors whose investment horizon is longer than the duration of their bonds. These investors may actually benefit from rising rates in the form of higher total returns.

“However, bonds should not be assessed solely for their return potential, but rather for the role they play in insulating a portfolio against market downturns and how they can help increase portfolio diversification”.

———

[1] https://www.vanguard.com.au/media-centre/articles/vanguard-investors-stay-the-course

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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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Vanguard also recorded its second largest quarter on record with over A$2 billion in inflows and had the top three most popular funds in the market: Vanguard Australian Shares Index ETF (VAS, A$766 million), Vanguard MSCI Index International Shares ETF (VGS, A$404 million) and Vanguard Diversified High Growth ETF (VDHG, A$391 million).

“It’s encouraging to see an increasing number of investors putting their trust in Vanguard and investing with us. We’re also pleased that investors continue to realise the many benefits of broad-based ETFs that have stood the test of time, particularly how they provide low-cost, diversified exposure to overseas markets that may otherwise be inaccessible,” said Minh Tieu, Vanguard’s Head of ETF Capital Markets, Asia-Pacific.

The Australian ETF market also surpassed A$111 billion in AUM as investor momentum continues.

Australian investors continue to favour international equities

Global equity ETFs were the asset class of choice for Australian investors in the first half of the year, recording A$2.2 billion in inflows in Q1 and A$2.7 billion in Q2 (total: A$4.9 billion in H1 2021).

Domestic equities drew a total of A$1.5 billion in H1 2021, 69 per cent less than global equities.

Commenting on the demand for international shares, Mr Tieu said: “while COVID-19 management differs in effectiveness between countries, investor confidence in overseas markets continues to improve.

“As vaccination rates continue to rise and consumption continues to rebound, Australian investors are looking for ways to capitalise on international growth opportunities with economies reopening.

“Our mid-year economic and market update forecasts at least 7 per cent full year growth for the US and the UK for 2021, 8.5 per cent full year growth for China, and above 6 per cent full year growth for emerging markets. Australia is forecast to record full year growth of around 5.5 per cent for 2021.

“International equity ETFs are proving to be an efficient way for investors to gain access to global investment opportunities, while at the same time reducing home country bias and further diversifying portfolios”.

Bonds still play an important role in portfolios

While equities dominated demand in H1 2021, domestic bonds still recorded A$690m in inflows while global bonds recorded A$608m.

“Returns from bonds in both Australian and international markets are likely to be modest, but we see bonds not purely as return-generating assets, but rather as essential portfolio diversifiers. Bonds play a crucial role in reducing the volatility of a portfolio when markets are turbulent and serve as a ballast to riskier assets such as equities,” said Mr Tieu.

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More broadly, the Australian ETF industry has surpassed the A$100 billion milestone with A$102 billion in AUM as at the end of March 2021.

“Investor confidence has greatly improved since this time last year when markets were first rocked by COVID-19. While domestic equity, niche and leveraged ETFs were favoured in the first half of 2020 as investors sought to navigate market volatility, a year on we are seeing better diversification across both asset classes and ETF types, with a notable increase in flows to international equity and actively managed ETFs,” said Minh Tieu, Head of Capital Markets for Asia-Pacific.

Vanguard’s actively managed ETFs saw A$44.5 million in inflows (more than double the previous quarter), while our international equity ETFs saw A$660.6 million in inflows.

2021 also marks 20 years since the first ETF was launched in Australia. Reflecting on its history, Mr Tieu said “the Australian ETF industry has come a long way since the first ETF was listed in August 2001. We’ve seen impressive market growth over the last few years in particular, evidenced by the industry surpassing A$100 billion in assets across the now 220 and growing ETFs listed on the ASX when just ten years ago we had only 50.

“Australian investors and advisers have embraced ETFs as low-cost, easy to access building blocks for diversified portfolios.”

Bonds still have a place in portfolios

Across the market, fixed income ETFs experienced slight outflows in Q1, drawing in A$729.1 million less than the previous quarter. Australian bond ETFs (Q1: A$298.9 million) and international bond ETFs (Q1: A$311.9 million) experienced similar inflows, suggesting investors are further diversifiying their portfolios by seeking exposure to international markets where there is a broader spectrum of economic and political environments.

“Although the RBA has put official rates on hold, the market is still anticipating rising inflation coupled with falling bond prices as a result of government stimulus and economic growth. Consequently, some investors may be a little hesitant to invest in or hold onto their fixed income securities. It’s worth remembering in times like these that bonds still play an important role in a diversified portfolio,” said Mr Tieu.

“Equity returns may be stronger right now but markets are cyclical. Should equity markets dip, the fixed income portion of a portfolio can act as a shock absorber and cushion any adverse movements.

“Ultimately however, investors should determine their strategic asset allocation according to their individual goals and risk profile. Getting the right balance of bonds and shares is important, but adhering to it in the long-run is just as crucial,” said Mr Tieu.

ESG investing continues to grow

ESG ETFs attracted A$442.6 million in Q1 2021, a 6.8 per cent increase since Q4 2020 and a 15.3 per cent increase year on year.

“We’ve observed a continued interest in investment products that factor in environmental, social and governance considerations. ESG ETFs can provide investors with the option to invest according to their values but in a simple, diversified way.

“Vanguard Australia will continue to assess new opportunities to offer our investors low-cost, high-quality products with long-term return potential, including in the ESG space,” said Mr Tieu.

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In addition to leading cash flows, Vanguard remains the largest issuer of ETFs by assets under management (AUM), accounting for 27.4 per cent (A$25.8 billion) of total market AUM as at 31 December 2020.

Vanguard’s flagship Australian Shares ETF, VAS, continued to see the largest inflows of any product in the market with a total of A$2.3 billion in 2020, and A$648 million in Q4 alone.

“These unprecedented flows show just how popular ETFs are becoming with both retail, advised and institutional investors alike,” said Minh Tieu, Head of Capital Markets for Asia-Pacific.

“More and more investors are valuing the inherent characteristics of ETFs that make them such an appealing investment option. The low barrier to entry from a cost and ease of use perspective, coupled with diversification, make ETFs an attractive choice for many Australian investors.

It is likely that confidence also continues to grow in the resiliency of ETFs. Even in the face of extreme market volatility, ETFs did not experience any trading or liquidity issues in 2020”.

The December quarter also saw Vanguard cap off a strong year with its best quarter on record, receiving A$2.1 billion in inflows, a 145 per cent increase from Q3.

Australian ETF Industry approaching A$100 billion

The Australian ETF industry again reached a new high, surpassing A$94.6 billion in AUM as at the end of 2020.

“Last year we saw a wave of new retail investors enter the market for the first time. Along with the cost benefits and flexibility, ETFs allow for greater value transparency, providing investors with real-time pricing via the exchange,” said Mr Tieu.

“We also continue to see greater participation year on year from institutional investors, with greater availability of ultra low cost ETFs likely bolstering demand”.

As with the previous quarter, international equity ETFs were favoured over domestic equity ETFs in Q4.

“The market exposure provided by international ETFs is a drawcard for many investors who are looking to diversify away from home-grown companies,” said Mr Tieu.

“With international shares, particularly those with exposure to the technology sector, outperforming in the second half of 2020, investors may be seizing the opportunity to capture higher returns. ETFs can be a low cost and efficient gateway to overseas markets where these shares may be more difficult and expensive to purchase individually”.

Domestic bond ETFs in Q4 however drew A$753 million in inflows, A$363 million more than international bond ETFs, suggesting greater investor confidence in local bond markets as economic and political upheaval continues overseas.

Diversified ETFs inflows also increased by A$242 million in Q4 (Q3: A$148 million).

Looking ahead in 2021

As global economic recovery continues and the Australian ETF industry further matures, the momentum experienced in 2020 is unlikely to wane.

“With the prospect of a COVID-19 vaccine on the horizon bringing hope of global economic recovery, the ETF market may continue to see greater investor participation,” said Mr Tieu.

“Even if markets experience the same heightened volatility this year as they did last, investors know that ETFs can withstand the test. Broad based, low cost, diversified ETFs continue to be accessible, liquid and a worthy inclusion in any portfolio”.

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