Fixed income ETFs could become half of Aussie ETF market

17 July 2019

The need for fixed income assets is growing in Australia as investors both age and look for diversification, and BetaShares chief executive, Alex Vynokur, predicts that exchange traded funds (ETFs) in the asset class could end up becoming half of the total ETF market.

While fixed income as an asset class has been “relatively overlooked for a significant amount of time as the equity market has been strong”, a combination of investors and super funds needing to managing sequencing risk and volatility more as Australians age and a growing appetite for diversification has seen its appeal grow.

With the asset class traditionally having a high entry point – the cost of a single bond is proof – ETFs had the potential to crack the fixed income space open for retail investors, Vynokur believed.

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Of course, fixed income active managers were already active in the market, and had been for years. Vynokur said that both active funds and ETFs could co-exist in the space, but noted that active managers in fixed income assets had traditionally struggled to outperform the benchmark, as well as oft-cited benefits to ETFs such as cost and ease of investing.

Vynokur also pointed to Australia as an attractive hunting ground for fixed income; yields and returns for the asset class were often relatively low compared to Australia, so foreign investors were coming here. He said that investors also needed to consider currency risk as it’s a low volatility asset class, so they would want to hedge back to AUD, which investing domestically removed the need for.

Australia also offered an appealing market for fixed income ETFs, which were already one of the largest ETF asset classes in the United States and growing rapidly here.

“The opportunity for Australia’s fixed income ETF market is very significant and we’re only just hitting our strikes,” Vynokur said. “There’s a phenomenal opportunity for investors to build more robust portfolios with fixed income allocations and that’s resounding with investors.”

The BetaShares CEO predicted that fixed income offerings could become half or even more of the total ETF market.

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