Fixed interest and cash ETP update

Published on
January 14, 2021
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Fixed interest and cash ETP update

Assets of fixed interest and cash exchanged traded products (ETP) grew 30% in the 12 months to end September 2020, according to findings from the latest Rainmaker ETP Report.

"Fixedinterest is in the spotlight as it is an asset class that has beengrowing for the past few years at the same rate as the overall ETPmarket," said John Dyall, head of investment research atRainmaker Information.

"Part of thereason is that term deposits interest rates are so low now thatinvestors, retirees and their financial planners are desperatelylooking for alternatives that will satisfy their income andinvestment objectives."

Fixed interest andcash products generated $2.9 billion in net flows, in the 12 monthsto 30 September 2020.

"While thiswas down 25% on the $3.9 billion of the previous 12 months, it is130% higher than the year ending September 2018."

Fixed interest andcash products grew in funds under management (FUM) size by 38% and15% respectively. In comparison, Australian equities grew by 25%while international equities grew by 25%.

"The peak netflow was at $5 billion a year in February 2020 before COVID-19changed investors' priorities."

The number of fixedinterest and cash ETPs increased by nine to 41, where four of the41 products are cash or cash enhanced. These products make up 17%of the ETP market.

"Of the 41fixed interest ETPs, only two are labelled specifically as ESG,although it's arguable that most government bonds and cashare ESG by default."

Fixed interest andcash products can generally be defined by their duration and thecredit ratings of their underlying securities.

"Looking atthe top four by FUM, they invest differently to one another, havingdifferent objectives and management fees."

The largest cohortamong fixed interest products is government bonds with 40% of totalfixed interest ETP net flows.

"They haveduration risk due to their interest rate variability, noting thatthe longer the duration the more interest rate risk they have,which is the sensitivity of the portfolio's capital value tochanges in interest rates."

The second largestcohort by FUM is short duration credit, which attracted around 20%of net flows.

"Thesegenerally invest in investment grade corporate securities withlittle to no interest rate risk."

The second largestcohort by number and third by size are corporate bonds. These aresimilar to government bonds, in that they are investment grade andhave duration risk.

"The AbsoluteReturn sector appears to be the most dynamic as their products areactively managed and 83% of those products have investmentobjectives aligned with the RBA cash rate," saidDyall.

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