Vanguard has “significantly increased” its expected returns for bond exchange traded funds (ETFs) in 2023.
Flows into the firm’s fixed income ETFs had picked up in late 2022 with inflows to global bond ETFs reaching almost $500 million in Q4 and Australian bond ETFs sitting at $733 million in the quarter.
On an annual basis, flows into Australian fixed income ETFs were $2.7 billion in 2022 compared to $1.6 billion in 2021 although global bonds declined from $1.1 billion to $783 million.
Research by BetaShares at the end of 2022 found overall fixed income ETFs had seen a “comeback” in 2022, recording $3.6 billion in inflows during the year compared to $2.9 billion in the previous year. It was also the most-popular asset class during December when it saw $596 million in inflows.
Vanguard said it now expected global bond ETFs to return 3.9%-4.9% and domestic bonds ETFs could return 3.7%-4.7% over the next decade, a two percentage point increase.
Minh Tieu, Vanguard’s head of ETF capital markets, said: “In 2023, our return expectations for fixed income have significantly increased compared to a year ago.
“The unusual correlation we saw between bonds and equities in 2022 is also set to end, delivering greater diversification benefits to balanced portfolio holders. On this note, last year we saw a lot of commentary about the death of the 60/40 portfolio and this year, likely to see a flip in sentiment declaring its resurgence as bond returns turn positive.”
Conversely, flows into Vanguard’s international equities ETFs declined 59% in the final quarter of 2022 from $814 million in Q3 to $334 million as a result of turmoil caused by economic and geopolitical events.
However, inflows into Australian equity ETFs remained steady at around $800 million with the firm’s Vanguard Australian Shares index fund sitting at $11.8 billion, the largest ETF in the Australian market.
