Investors Seek New Fixed Income Options

Fixed income ETF product development is becoming more innovative, according to a recent report, as assets have quadrupled since 2021. In the firm’s Q2 ETF report, it said assets are growing strongly in this category and have quadrupled since 2021.

In the second quarter, passive fixed income ETFs were the dominant vehicle, with $38 billion in assets under management, while active ETFs stood at $14.5 billion.

Fixed Income ETF Market

As of the second quarter, there were 60 passive fixed income ETFs and 43 active ones. Active ETFs have grown strongly, with only 20 vehicles in 2024.

Australian bonds were the preferred choice, with 30% of market share, followed by diversified credit at 26.3%. Global bond counterparts stood at 14.8% of total assets under management.

Diversified credit saw $694 million in inflows, closely followed by Australian bonds, which took in $693 million. Emerging market debt bonds and Australian cash vehicles were the only sectors to see outflows at $11.4 million and $72 million respectively.

Investor Demand

Investors favored unconstrained and inflation-linked strategies, reflecting a presence for diversified sources of income and duration exposure. Demand for cash and short-term defensive exposures weakened.

“Diversified credit remained the largest recipient of fixed-income flows in the second quarter. Demand for Australian and global bonds was also strong, with both categories attracting substantial inflows.”

Morningstar noted that product development is also expanding beyond traditional bonds, with the launch of ETFs focused on private debt. This includes the VanEck Global Listed Private Credit (AUD Hedged) ETF, launched in February.

Betashares launched the ASX-listed Diversified Credit Income ETF (DCRD) in August, which uses a blend of credit income ETFs to provide exposure to senior floating-rate Australian bank bonds, subordinated bonds and interest-rate hedged Australian investment grade corporate bonds.

State Street also launched the State Street Blackstone Senior Loan (AUD Hedged) Active ETF (SBSL) and State Street Blackstone High Income (AUD Hedged) Active ETF (SBHI) in August, listing on the ASX.

Monthly Flows

A similar monthly report found that the ETF seeing the most flows in July was the Vanguard Global Aggregate Bond Index (Hedged) ETF, which took in $388 million. This was the only fixed income ETF to feature in the top 10 funds for the month.

For now, it’s clear that fixed income ETFs are becoming an increasingly important part of the investment setting. With their ability to provide diversified sources of income and duration exposure, they’re an attractive option for investors looking to handle complex markets.