Vanguard

Slowdown in ETF flows reflect global uncertainty but investors remain resilient

MELBOURNE, 13 April 2022 - The Australian ETF market continues to grow year on year albeit at a slower rate, with flows in Q1 2022 reflecting the impact of heightened market volatility, according to data released by the ASX and Vanguard.

Australian ETFs recorded A$132 billion in AUM in Q1 2022 (Q1 2021: A$102 billion, Q1 2020: A$57 billion).

Compared to the previous quarter however, market AUM decreased by A$2 billion (Q4 2021: A$134 billion) as events such as the Ukraine war and changes to US monetary policy dampened investor confidence. 

Despite this, Vanguard experienced its third best quarter on record, receiving A$2.2 billion in inflows in Q1 2022, accounting for 46.4 per cent of the market. Vanguard also received the most cash flow of any Australian issuer in March.

“Market conditions are challenging right now, but we’re pleased to see investors are still choosing to invest with Vanguard and using ETFs to build or complement their portfolios,” said Minh Tieu, Head of ETF Capital Markets Asia-Pacific and Investment Strategy Group.

“Vanguard has long advocated that in times of heightened volatility, the best thing investors can do is to simply stay the course. As history has proven, significantly altering asset allocations or cashing out in response to short-term events will exclude investors from fully participating in the inevitable market recovery”.

Despite global volatility, investors still favour international equities 

As in 2021, investors continued to direct flows into global equity ETFs, recording A$1.6 billion in Q1 2022. Domestic equities also saw A$1.1 billion in inflows.

While equities were still the most popular asset class amongst Australian investors, flows into global equities decreased by approximately 48 per cent and domestic equities by 50 per cent when compared to the previous quarter. 

“Understandably, the uncertainty surrounding the Ukraine war and the ongoing economic impacts of COVID-19 are weighing heavy on investors’ minds. That being said, we’re still seeing resilient market flows and, according to data from our Personal Investor platform, Vanguard investors in particular are not letting global volatility deter them from investing regularly and according to plan,” said Mr Tieu.   

Vanguard’s Australian Shares Index ETF (VAS) was the most popular product in Q1 2022, recording A$731 million in inflows. VAS now has an AUM of A$11 billion, having grown 41 per cent year on year (Q1 2021: A$7.8 billion).

Flows into Vanguard’s Global Value Equity Active ETF also increased since last quarter, recording A$228 million in Q1. This may suggest value stocks are experiencing a resurgence over growth as investors prioritise income and stability.

Rising rates on investors’ minds

Flows into fixed income ETFs decreased in Q1 2022 compared to the previous quarter, with cash ETFs in particular experiencing A$555 million in outflows.

Australian fixed income ETFs recorded A$325 million, down 44 per cent since Q4 2021 but still approximately 15 per cent more than global fixed income ETFs, which received A$278 million in Q1 2022.

“With inflation rising and interest rates in Australia and the U.S expected to increase in the coming months, there’s been less demand for fixed income products across the board,” said Mr Tieu.

“Although tightening monetary policy and rising rates will generally mean a fall in bond prices, there is a silver lining for investors whose investment horizon is longer than the duration of their bonds. These investors may actually benefit from rising rates in the form of higher total returns.

“However, bonds should not be assessed solely for their return potential, but rather for the role they play in insulating a portfolio against market downturns and how they can help increase portfolio diversification”.

Australian ETF market net cash flow by asset class (Q1 2022 v Q4 2021)

Top 5 Vanguard Australia ETFs by cash flow (Q1 2022)