Fixed interest resurgence fuels ETF innovation, inflows
An increasing number of clients are asking advisers about opportunities in fixed income and outlooks for 2023, though the hawkish tone from the RBA may dampen sentiment, said a leading investment adviser.
Brett Grant, head of product, customer experience and trading at AUSIEX, said expectations that central banks would ease rate hikes over 2023 would drive hopes that fixed interest will fare better this year and resume its position as the defensive element offsetting the volatility that is the norm for share market investments.
He said the data from AUSIEX up until 28 February 2023 showed 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.
“Exchange traded funds (ETFs) with a focus on fixed interest were among those that benefited most from renewed appetite for fixed interest over the past six months as investors looked to build allocations to an asset class that suffered an atypical decline in 2022,” Mr Grant said.
From a sample of its own cohort data, AUSIEX found there was a 24.48 per cent per cent increase in fixed interest ETF buy trades and a 2.99 per cent increase in average buy trade size in the six months to 31 December, with a mixture of floating rate, government, corporate and composite bond ETFs making up the top 10 bought securities.
“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,” Mr Grant continued.
“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.”
He said 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.
“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.”
In 2022, at least six new fixed-interest ETFs were launched as providers sought to broaden the scope of assets and investment philosophies available.
“Several of the new products appear to be part of a trend in which global investors are increasingly using ETFs to allocate capital to non-core sectors of the fixed interest market,” he said.
A State Street Global Advisers survey of 700 institutional investors and investment decision-makers released in October 2022 found that 62 per cent 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 per cent indicated they would employ the same strategy for emerging-market debt.
Mr Grant said for income-focused advisers and investors there are plenty of heavily-traded options available via exchange-traded funds to gain diversified exposure to a range of both domestic and international asset types to maintain and protect income.
“With the conditions in much of the latter half of the 2022 calendar year still prevailing in 2023, we may well see interest in these ETFs continue to rise.”
