Australian investors flock to low-cost ETFs, abandoning active managers

The highest yields in a decade has seen Australian investors rush into fixed income ETFs and managed funds.

Over half of ETF flows jumped into bond funds, with investors lured by the highest yields on offer in over a decade.

Australian investors fled active managers in record numbers in the second quarter and jumped into low-cost exchange traded funds helping the index-hugging industry reach a record $150bn in funds under management in June.

Fresh ASX and CBOE data shows the milestone was reached earlier than expected, with ETFs now on track to exceed $160bn in FUM this calendar year, according to Betashares.

Over half of ETF flows jumped into bond funds, with investors lured by the highest yields on offer in over a decade.

Active ETFs had $876m in net outflows, driven by Magellan’s funds stable.

Fixed income was also the only asset class with positive flows in managed funds in the second quarter, to book inflows of $1.2bn in the first half of the year, according to Calastone.

“Fixed income funds have not looked so attractive since before the global financial crisis,” Teresa Walker, Calastone managing director for Australia and New Zealand said.

With three-year bond yields surging to about 4.2 per cent, short-dated fixed income funds are offering investors higher rates at very low risk.

“Recession fears stalking equity and property markets are making investors nervous,” she said. “The result is a flight to safety.”

About 51 per cent of the $4.8bn in net flows into ETFs this year have gone into fixed income products, 36 per cent into Australian shares and the balance into cash, according to Betashares.

“The cost effective nature of ETFs are quite additive to these asset classes, particularly defensive exposures, where fees can play a greater role in total performance give lower expected returns,” Betashres investment strategist Cameron Gleeson said.

“As the ETF industry evolves and more asset allocation options become available, we expect the shift towards the convenient and cost effective investment vehicle to continue.”

Commodities, international equities and currency ETFs had the largest outflows, driven by investors concerns over the rate environment and a looming US recession.

With $505m inflows, Betashares Australian High Interest Cash ETF saw the highest flows, while the ETF with the largest outflows by far was by the once high-flying Magellan Global Fund, which was $1.4bn in the red.

Managed funds saw $2.8bn heading for the exit in the three months to the end of June, the second consecutive quarter of outflows, and the worst quarter for managed funds since Calastone started compiling the numbers in 2019.

Global equity managed funds shed a net $1.52bn during the quarter, while domestic share funds saw a net outflow of $59m, while property funds suffered their worst quarter on record to shed $173m.

Originally published as Australian investors flock to low-cost ETFs, abandoning active managers