Investors pile into income ETFs amid upcoming tax changes

Australian investors are increasingly turning to income focused exchange traded funds (ETFs) as proposed changes to capital gains tax (CGT) sharpen the focus on after tax returns, according to new data from Global X ETFs.

The ETF provider's latest monthly market report found Australian equity ETFs attracted a record $2.3 billion in net inflows in May, accounting for about 42% of total industry flows and marking the strongest month on record for the asset class.

As the same time, Australian yield focused ETFs recorded their best month ever, attracting $243 million as investors sought greater exposure to dividend paying strategies.

Senior product and investment strategist Marc Jocum said the proposed CGT reforms appeared to be influencing portfolio construction decisions.

"Investor behaviour in May points to a clear pivot," Jocum said.

"The proposed CGT reforms have sharpened the focus on after-tax returns, prompting many Australians to reassess how their portfolios generate performance," he said.

"We're seeing a growing preference for income-oriented strategies that may be better positioned under a higher capital gains tax regime," Jocum said.

The shift comes as Australian high dividend ETFs have outperformed the broader share market by nearly 5% this year, reinforcing demand for income generating investments.

Beyond income strategies, Australian resource ETFs also enjoyed a record month, attracting more than $205 million in inflows as investors positioned for stronger commodity demand and long-term themes such as critical minerals and the energy transition.

Despite persistent inflation, rising unemployment and softer economic growth, Jocum said investors continued to show confidence in domestic markets.

"Sticky inflation, rising unemployment and subdued growth haven't deterred flows into Australian equities, suggesting a level of confidence in domestic markets and familiar sectors", he said.

The broader ETF industry continued its rapid expansion, growing by $17.7 billion, or 5.1%, in May to reach $364 billion in assets across 487 products.

Industry inflows totalled $5.4 billion for the month, marking the third consecutive month of at least $5 billion in new investment. Year-to-date inflows have already surpassed $26 billion, putting the sector on track to exceed last year's record $53 billion haul.

Global X also noted continued investor enthusiasm for artificial intelligence-related themes, with cyber security and semiconductor ETFs among the stronger performers, while investors rotated away from cash, energy and cryptocurrency exposures.

"With momentum building and the second half of the year typically a stronger period for flows, the ETF market is well positioned for continued expansion," Jocum said.