Fixed income ETFs prosper despite low rates

Latest research shows record low interest rates haven't put investors off fixed income, as Australia's ETF market continues to explode.

According to new figures released by the Australian Securities Exchange and Vanguard, investors are doubling down on their commitment to exchange traded funds, with the sector registering inflows of $13.7 billion across 2019, well over the $8 billion it turned in during 2018.

The latest figures show ETF assets are growing at a compound annual growth rate of more than 23% over the past five years, which Vanguard head of ETF capital markets for Asia Pacific Minh Tieu put down to more investors jumping on board with ETFs than ever before.

While 2019's challenging market conditions - including Brexit, Australia's federal election and the ongoing trade war between the US and China - were a distraction for many, Tieu said ETF growth remained on track.

"Despite these geopolitical conditions, more investors continued to embrace the benefits of ETFs, spurring growth in the market and increased competition among issuers that have in turn driven down the cost to invest, allowing investors to keep more of the returns they earn," Tieu said.

While investors used ETFs to return to growth asset classes such as Australian equity and global equity - which attracted 16% and 14% of Australian cash flows into ETFs last year - almost $3 billion poured into Australian fixed income ETFs, representing 21% of cash flows into ETFs. Vanguard's Australian fixed interest index ETF was a product of choice, picking up $536 million in inflows over the year.

"While fixed income products do not generally deliver high returns when compared with other investment products, they can play a crucial role in most investors' portfolios by providing diversification, and income and downside protection," Tieu said.

"We are pleased to see that even with record low interest rates, investors continued to invest funds into fixed income products across the year and understand the important role fixed income plays in a diverse portfolio."

Recently released Morningstar research shows that in 2019 Australian fixed interest enjoyed its strongest calendar year of performance since 2014, returning 7.3% over the year, up 3.6 percentage points from 2018.

All told the ETF sector has now grown to more than $61 billion locally, which Tieu welcomed.

"ETFs are a vehicle that investors can use to build diverse portfolios across multiple asset classes," he said.

"Vanguard's ethos is built around providing a range of products that help investors diversify their portfolios at a low cost, and we encourage a long-term strategy to enable investors to achieve their financial success."

Read more: ETFVanguardAustralian Securities ExchangeExchange traded fundsMinh TieuMorningstar
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