Bumper Year for Australian Bond ETFs as Investors Seek Haven

(Bloomberg) -- Flows into fixed-income exchange-traded funds in Australia have almost doubled as interest-rate cuts and lofty equity valuations prompt investors to seek shelter from rising risks.

Investors allocated 77% more to bond ETFs in the 12 months ended October, lifting assets to A$9.9 billion ($6.7 billion), according to data from ASX Ltd. They put more than A$2.9 billion into bond ETFs in 2019, versus A$1.32 billion last year and the most since 2012 when the products first became available in Australia, data from BetaShares and the ASX show.

“What’s really driving the growth and the flows is the fact that people are recognizing that the equity markets are pretty expensive and people are looking for diversification,” Alex Vynokur, chief executive officer of BetaShares, one of the largest managers of ETFs in Australia with about A$9.3 billion in assets, said in an interview in Sydney.

Money managed by all ETFs in Australia reached a record A$56.9 billion in October, helped by bond flows, though stocks hold the lion’s share of total ETF assets, the ASX data show.

BlackRock’s investment-grade Australian bond ETF held more than A$1 billion, having reached that milestone in less than two years.

“Investors are allocating to fixed income ETFs to provide ballast to their portfolios, given falling cash rates and an uncertain macro backdrop,” said Christian Obrist, head of BlackRock’s iShares business in Australia.

Over the past two decades, fixed income has proven to be a stable investment especially amid mounting global headwinds. The Bloomberg AusBond Composite Index has risen every year since 2000, while the benchmark S&P/ASX 200 Index has fallen in six over that period.

The appeal of debt has been a global theme in 2019. In the U.S., fixed-income ETFs are on pace to absorb more than equity funds for the first time since 2009, data compiled by Bloomberg Intelligence show. Meanwhile European debt ETFs are poised to grab more assets than stock strategies for the first time since 2016.

In Australia, with the bulk of rate cuts behind us and the chance of a U.S.-China trade deal putting pressure on bond prices, those flows may well ease. Still, appetite for Australian fixed-income assets may endure with swaps markets pricing another 25 basis points of easing from the nation’s central bank next year.

For BetaShares’ Vynokur, demand will stay high for these types of products which give investors access to instruments that have historically been difficult for them to tap, such as floating-rate, fixed-rate, corporate, government and hybrid bonds. About a third of BetaShares’ assets were in fixed income.

“Fixed income is going to be the key category that will drive the growth in the industry,” he said.

©2019 Bloomberg L.P.