Fixed income was very topical for Australian ETF investors over 2022, with the asset class receiving $3.6b in net inflows over the course of the year. A figure which was up from $2.9b in 2021. Overall, the Australian ETF Industry saw $13.5b in net inflows during 2022.
A recent survey by 2022 Betashares and Investment Trends found that 12% of ETF investors were invested in Australian fixed income, while 8% were invested in International fixed income.
In almost a mirror image, unlisted fixed income funds in Australia saw aggregate net outflows of $3.6b. While there was some investor support for unlisted mortgage funds and unlisted high yield funds, the majority of unlisted fund outflows came from active managers.
An EPFR Report in the Financial Times showed that active bond funds saw nearly ~US$800b of outflows globally over the course of 2022. In contrast, passively managed bond funds saw global inflows of ~US$300b over the same period.
Also read: Four Reasons To Be Cautious On Inflation
Cameron Gleeson, Senior Investment Strategist at Betashares said: “A normalisation of monetary policy caused significant volatility in fixed income over 2022, but after years of ultra-low rates investors finally saw attractive bond yields again. In light of this regime change, many investors took the opportunity to reposition their fixed income portfolio allocations.
“In quarter one, investors expressed a preference for the higher yields in fixed rate bond ETFs over cash and floating rate bond cash ETFs. However, after cash rates rose and government bonds sold off in the first half, cash and floating rate bond ETFs came back into favour in quarter three. In the last quarter of 2022, investors strongly supported both fixed and floating rate bond ETFs.
“For unlisted fixed income funds, some of the biggest outflows came from active managers focussing on investment grade fixed rate bonds. Whereas seven of the top ten unlisted fixed income funds for inflows were funds that focus on sub-investment grade/unrated debt, such as high yield, private debt or mortgages. While these funds may have avoided some of the volatility associated with fixed rate bonds in 2022, they are typically less liquid and higher risk. Generally speaking, investors should take care to look under the hood of their investments and make sure they are comfortable with the risk profile of all their investments – this is important in all market conditions, but particularly noteworthy as we head into an environment with elevated recessionary risks.
“Like other asset classes, it is clear investors are turning to ETFs to gain exposure to fixed income, particularly core investment grade fixed income. The inherent benefits of ETFs are beneficial for fixed income exposures within a portfolio as they provide convenient and cost-effective diversification for investors. As a result, ETFs are allowing investors from all walks of life – including advised, institutional and self-directed investors – to gain easier exposure to this important asset class.
“Looking ahead to 2023, we expect fixed income to continue to resonate with investors. The asset class offers attractive return potential across both fixed and floating rate bonds, and relative to equities on a risk adjusted basis.”
