Vanguard is bullish on expected returns for bond exchange traded funds for 2023 as market conditions improve.
The company believes that the momentum of flows into bonds in Q4 2022 is set to continue as investors continue to diversify their portfolios amongst continued high interest rates and improved market outlook.
Flows into fixed income ETFs picked up significantly in late 2022, particularly into global bond ETFs according to their data, with the fourth quarter recording $492 million compared to the third quarter with $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.
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“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.”
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.
