ETFs rising in popularity...


Investor inflows into Australian-listed exchange traded funds (ETFs) continued to rise in March.

ETF inflows for the month totalled $1.89 billion, the highest for the year so far, according to Australian Securities Exchange (ASX) data.

In fact, they were more than $400 million higher than the $1.43 billion of ETF inflows recorded in February.

When combined with the $1.36 billion of inflows recorded in January, total Australian ETF investment inflows over the first quarter of 2022 reached $4.68 billion.

They helped bring the total value of ETF investments in Australia at the end of March to $132.34 billion.

That figure was almost 30 per cent above the total value of ETF investor assets under management at the end of March 2021 when the sector here broke through $100 billion for the first time.

Behind the ETF inflows

Behind the latest raw ETF inflows numbers, both from March and over the first quarter, are some prevailing investment trends. They're largely being driven by global economic factors and escalating geopolitical events.

Increased volatility has been a feature of financial markets since the very start of 2022.

One of the key volatility drivers has been rising inflation levels, which are placing pressure on central banks around the world to lift their official interest rates.

Higher rates invariably lead to lower demand for goods and services, and a consequent slowing in economic growth.

The U.S. Federal Reserve Bank has already moved to raise its official interest rate and has flagged that several more rate rises will occur over the course of 2022.

The Reserve Bank of Australia is widely expected to raise Australia's cash rate from its record low level of 0.1 per cent in the coming months.

But the most prominent factor fuelling markets volatility, especially since late February, has been the ongoing Russian incursion into Ukraine.

The rapid escalation of events in the region has triggered multiple sharp daily falls on share markets.

"Vanguard has long advocated that in times of heightened volatility, the best thing investors can do is to simply stay the course," says Minh Tieu, Vanguard's Head of ETF Capital Markets Asia-Pacific and Investment Strategy Group.

Following the ETF money flows

Vanguard experienced it's third-best quarter on record, receiving $2.2 billion in inflows in the first three months. This represented 46 per cent of all investments into the Australian ETFs market.

Despite the current international events, many investors are continuing to direct their money into ETFs with international equities (shares) exposures.

The ASX data shows international equity ETFs captured $1.6 billion in the March quarter, while domestic equities attracted $1.1 billion in inflows.

While equities were still the most popular asset class among Australian investors, flows into global equities fell almost 40 per cent when compared to the previous quarter. Inflows into domestic equities fell by 50 per cent.

"Understandably, the uncertainty surrounding the Ukraine war and the going economic impacts of COVID-19 are weighing heavy on investors' minds," says Tieu.

"That being said we're still seeing resilient market flows and, according to data from our Personal Investor platform, Vanguard investors in particular are not letting global volatility deter them from investing regularly and according to plan."

Vanguard's Australian Shares Index ETF (VAS) remained the most popular ETF product in the March quarter, attracting $731 million in inflows.

VAS had $11.03 billion in investor assets under management on 31 March.

Flows into Vanguard's Global Value Equity Active ETF increased over the previous quarter, with the ETF recording $228 million in cash flow.

This may suggest value stocks are experiencing a resurgence over growth stocks as investors prioritise income and stability.

Meanwhile, concerns over rising interest rates saw fixed income ETFs experience lower inflows in the March quarter, while cash ETFs recorded outflows.

A total of $325.0 million flowed into Australian fixed income, down 44 per cent since the previous quarter but still approximately 15 per cent more than global fixed income ETFs, which received $277.8 million in the quarter.

"Although tightening monetary policy and rising rates will generally mean a fall in bond prices, there is a silver lining for investors whose investment horizon is longer than the duration of their bonds," says Tieu. "These investors may actually benefit from rising rates in the form of higher total returns.

"However, bonds should not be assessed solely for their return potential, but rather for the role they play in insulating a portfolio against market downturns and how they can help increase portfolio diversification".

Investors target multi-asset ETFs

Another continuing trend has been the ongoing growth of investments inflows into diversified ETFs.

Diversified ETFs are ready-made portfolios that offer investors varying exposures to equities and bonds, depending on their risk profile.

This segment recorded $101.24 million of new inflows in March, with the Vanguard Diversified High Growth ETF (VDHG) accounting for $52.73 million of those inflows. In the first quarter VDHG attracted $164 million of investor inflows.

VDHG offers broad diversification across multiple asset classes, targeting 90 per cent allocation to growth asset classes (shares) and 10 per cent allocation to income asset classes (bonds). International equities represent over half of VDHG's target allocation.

"Market conditions are challenging right now, but we're pleased to see investors are still choosing to invest with Vanguard and using ETFs to build or complement their portfolios," says Tieu.

Vanguard Australia