September wasn't a great month for most investors worldwide, with a range of economic and political factors contributing to weaker returns.

Yet, despite more volatile market conditions, investor inflows into exchange traded funds (ETFs) continued at a record pace.

The reasons for that are relatively clear. ETFs, especially funds that invest broadly across share markets such as the Australian Securities Exchange (ASX), have become the investment vehicle of choice for millions of investors around the world.

Rather than buying shares in a number of companies individually (stock picking), more and more investors are preferring to use low-cost ETFs.

That's because, through a single stock exchange trade, they can gain exposure to hundreds, and sometimes thousands, of listed companies in Australia and overseas.

As well as saving on the multiple brokerage fees that would be payable if they had bought lots of different shares, ETF investors are also achieving broad diversification across different markets and asset classes.

There are now more than 200 ETF products listed on the ASX, including products covering the broad Australian share market, the U.S. market, Europe, Asia, and other key regions.

There's also a wide variety of ETFs covering different sectors, such as fixed income and property, and increasingly popular diversified ETFs that provide “ready-made” exposures to multiple asset classes.

2021 inflows exceed $1 trillion

More than A$1 trillion (US$924 billion) has flowed into ETFs globally so far this year, taking total industry assets under management to around $10 trillion.

September was the 28th consecutive month of net inflows into ETFs.

In fact, the inflows into ETFs this year are already well above the US$763 billion in total ETF inflows recorded in 2020.

They're also close to double the US$487 billion in inflows that were recorded up to the end of the September quarter last year.

The Australian ETF industry saw its strongest three months on record to the end of this September, with $9 billion in inflows.

Collectively, the domestic ETF industry is now managing close to A$130 billion in investment assets on behalf of hundreds of thousands of Australians. This represents a A$35 billion, or 37 per cent, increase over this time last year.

Where are investors investing?

Global equity ETFs, which provide easy access to the shares of companies in other countries and regions, are continuing to capture the biggest investment inflows from Australian investors.

Close to A$5 billion flowed into global ETFs in the September quarter, taking year-to-date inflows to A$10.9 billion. That represented an almost 50 per cent year-on-year increase.

Another trend that gained momentum over the third quarter was a rise in switching activity from international equity ETFs that are hedged to the Australian dollar.

Hedged ETFs remove currency volatility, however the switching to unhedged international products listed on the ASX is a possible indication some investors expect the Australian dollar to fall in value.

The Australian dollar has fallen around 7.5 per cent against the U.S. dollar over the last year.

But keep in mind that it's extremely difficult to predict shorter-term currency rate movements. Vanguard research also shows they generally have a neutral impact on returns over the longer term.

Investors are targeting diversified funds

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

This segment recorded A$564 million of new inflows in the September quarter, which compared with A$400 million of inflows in the June quarter.

Vanguard's Diversified High Growth ETF (VDHG) represented A$291 million of the total multi-asset ETF inflows (51.6 per cent), up from A$218 million in the second quarter and A$172 million in the March quarter.

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

In the fixed income category, domestic bond ETFs (A$410 million of inflows) were preferred over international bond ETFs (A$366 million) in the third quarter.

Flows into Australian corporate bonds reached A$75 million, well surpassing government bonds, which recorded a A$5 million outflow.

Fixed income returns continue to be impacted by record low interest rates, although it's important to recognise that bonds play an essential role in helping to diversify portfolios and offsetting share market volatility.

The returns from bonds are generally significantly higher than cash returns.

Tony Kaye, Vanguard