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More diversity in ETF flows as investors move off the cash sidelines

Vanguard | 20 October 2020


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Despite ongoing global economic and geopolitical uncertainty, flows into equities and bonds continued to increase in Q3 2020 according to the latest figures released by the Australian Securities Exchange (ASX) and Vanguard.

A$1.9b flowed into international equities compared to A$1.18b into domestic equities in the September quarter, reversing the home-preference trend evident in the June quarter.

"Even with the uncertainty surrounding global events such as the US Election, cash is seeing less inflows than earlier in the year while international equities is seeing more. It's possible that many Australian investors are seeing this window as an opportunity to further diversify their portfolios and capture any increased returns," said Minh Tieu, Head of Capital Markets for Asia-Pacific.

The Australian ETF industry also surpassed A$71b in assets under management (AUM), with A$4.9b in new inflows between July to September.

Domestic bonds drew A$671m in inflow, A$390m more than international bonds in Q3, and triple the flow seen in Q2. This indicates a strengthening of the local bond market as investors continue to build up their conservative allocation.

Diversified ETFs also maintained steady growth in Q3 with inflows of A$148m, up from A$112m in Q2 and A$125m in Q1.

"Investors see diversified ETFs as an efficient way to gain exposure to multiple asset classes in a single trade, and a simple way to mitigate market risks by ensuring their portfolios are broadly diversified," said Mr Tieu.

Vanguard's flagship Australian Shares ETF, VAS, the largest ETF on the ASX with A$5.76b AUM continues to be the most popular ETF in the market in 2020. VAS attracted an additional A$207m in Q3 and A$1.64b YTD.

Growing uptake of ESG and niche ETFs

Interest in ethical investing continues as a trend, with ESG ETFs attracting A$350.1m in the last quarter.

"Investors are increasingly voicing their opinions and expressing their values through their investments," said Mr Tieu.

"We see ESG as an enduring trend which is why we've just increased our ESG ETF offerings to include the Vanguard Ethically Conscious Australian Shares ETF . By expanding our ESG range, we are providing investors with a broader toolkit to construct balanced ESG portfolios using ETFs that are consistent with their beliefs, while staying true to their asset allocation goals."

Another notable trend continuing in the last quarter is the rising uptake of niche ETFs. Unlike broad-based market capitalisation weighted ETFs, niche ETFs are constructed around a specific theme or are inverse or leveraged to magnify returns.

"The increase in trading of niche ETFs suggests some investors are using them as a speculative tool to outperform the market. If that's the case, we would urge strong caution that these niche ETFs are much riskier than a broad-based ETF as they do not offer the same diversification benefits and may encourage speculative trading behaviour," said Mr Tieu.

2020 ETF market net cash flow by asset class

Asset class Q3 Cash Flow
($m)
Q3 Cash Flow
(% of total market)
Q2 Cash Flow
($m)
YTD
($m)
Global equity 1918.6 38.9% 1107.8 4052.4
Australian equity 1179.9 23.9% 2000.2 5076.6
Australian fixed income 671.4 13.6% 219.7 873.6
Commodity 475.9 9.7% 436.5 1404.4
Global fixed income 281.2 5.7% -68.6 354.8
Cash 150.9 3.1% 363.9 325.2
Multi asset 148.1 3.0% 111.9 385.1
Infrastructure 97.3 2.0% 78.8 299.8
Australian property 43.5 0.9% 132.4 293.4
Global property 32.7 0.7% 17.5 80.4
Currency -68.4 -1.4% -7.4 -21.4

Top 5 Vanguard Australia ETFs by cash flow (Q3 2020)

Product ASX Code Cash Flow ($m)
Vanguard Australian Shares ETF VAS $207.2
Vanguard MSCI Index International Shares ETF VGS $105.8
Vanguard Diversified High Growth Index ETF VDHG $76.0
Vanguard International Fixed Interest Index (Hedged) ETF VIF $64.9
Vanguard Australian Government Bond Index ETF VGB $64.2

About Vanguard

With nearly AUD $9 trillion in assets under management as of 30 September 2020, including more than AUD $1.9 trillion in ETFs, Vanguard is one of the world's largest global investment management companies. In Australia, Vanguard has been serving financial advisers, retail clients and institutional investors for more than 20 years.