Fixed interest resurgence fuels ETF innovation, inflows

15 MARCH 2023

There was a 24.5% per cent increase in fixed interest ETF buy trades in the half year to end December 2022, according to data from the country’s leading wholesale trading platform AUSIEX.

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”.

“The variety of available ETFs makes it possible to construct a properly diversified fixed interest portfolio almost entirely through these vehicles, which have the additional advantage of being products that many investors understand and are confident to hold.”

Bonds historically perform better in periods when share markets suffer losses, but the two asset classes declined in tandem last year as central banks pushed interest rates significantly higher to curb inflation. It was the first time since 1928 that both equities and fixed income dropped more than 10 per cent.

Expectations that central banks would ease rate hikes over 2023, is driving hopes that fixed interest will fare better this year and resume its position as the defensive element that offsets the volatility that is the norm for share market investments.

Mr Grant 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

Mr Grant said: “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 2.17% total return in the three months to January 311, as did the iShares Core Composite Bond ETF (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

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.

A State Street Global Advisers survey of 700 institutional investors and investment decision makers released in October last year found that 62% of investors who planned to increase exposure to high-yield corporate credit over the following 12 months said it was likely they would use ETFs to do so, and 53% indicated they would employ the same strategy for emerging-market debt.

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.”

About AUSIEX

With over 25 years of experience in the local market and the backing of a multinational trading technology powerhouse, AUSIEX combines deep expertise with trusted and reliable technology to deliver trading solutions for financial institutions, intermediaries, advisers and industry participants. Owned by Nomura Research Institute Ltd (NRI), AUSIEX specialises in equities execution, clearing and settlement services and equities administration for the wholesale market.

As one of Australia's leading providers of trading solutions, AUSIEX has used its scale, expertise and heritage to deliver value for advisers, brokers, many large institutions and tens of thousands of their clients by seamlessly connecting them to markets.

Disclaimer

This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. Share Trading is a service provided by AUSIEX.

This information contains general advice and has been prepared without taking into account your objectives, financial situation or needs. You should consider its appropriateness, having regard to your objectives, financial situation and needs. Investors should read the relevant disclosure document and seek professional advice before making any decision based on this information. This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a wholly owned subsidiary of Nomura Research Institute Limited (NRI). AUSIEX is a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.