The rapid rise in global interest rates in 2022. and 2023 increased market volatility and unsettled traditional investments in stocks and bonds. In response, investors have increasingly gravitated toward fixed income ETFs, attracted by their cost efficiency and stable returns.

According to Global X, higher interest rates have put “income” back into fixed income.

In a recent update, the fund manager said: “The challenging climate has led investors to choose cheaper investment options that offer reliable returns, and ETFs have stolen the spotlight from managed funds at this key time for fixed income.”

Currently valued at approximately $28 billion, fixed income ETFs now account for 14 per cent of the total Australian ETF market, up from the 7 per cent market share they held 10 years ago.

In addition, in 2023 Fixed income ETFs saw inflows on par with equity ETFs for the first time, with an impressive $6.5 billion invested, representing 43 percent of total market inflows – setting a record for the highest proportional level achieved.

Going forward, with interest rates expected to decline over the next two years despite continued inflation concerns, bond ETFs are likely to benefit from outperformance.

"Because fixed rate bond coupons are inversely related to interest rates, lower interest rates could make existing fixed rate bonds more attractive, potentially leading to higher prices and capital gains for investors," Global X said.

"Furthermore, they now provide stronger defensive features during potential market downturns as they can offer income to help cushion the impact, while a flight to safety can lead to higher fixed income prices .”

In line with this trend, Global X recently launched the Global X Australian Bank Credit ETF (ASX: BANK). This diversified ETF combines three types of fixed income securities linked to Australian banks into a single, cost-effective, index-based product listed on the share market.

“Australian banks are some of the highest quality financial institutions in the world, recognized for lower risk and strong capital positions. They pay attractive yields on some of their fixed income securities such as senior bonds, subordinated debt and hybrids that are higher than what their term deposits offer,” the fund manager said.

"ETFs have democratized access to this asset class, making fixed income easier, more liquid and cheaper to manage."

Maja Garatsa Djurdjevic

Maya's career in journalism spans more than a decade in finance, business and politics. Now an experienced editor and reporter in all elements of the financial services sector, before joining Momentum Media, Maya reported for several established news outlets in South East Europe, looking at key processes in post-conflict societies.