Australian investors are on the hunt for income and are piling into exchange-traded funds that are focused on dividends, bonds and cash amid higher interest rates and looming changes to capital gains tax.
Money flowing into cash and fixed-income-focused ETFs more than doubled in June to $1 billion from $494 million in May, according to Betashares. That accounted for 30 per cent of all Australian ETF flows for the month, and is the highest allocation to cash and fixed income since November.
It comes as traders pivot away from high-growth investment strategies that appear to be the losers of policy changes from both the Reserve Bank of Australia and those announced by the federal government in the budget.
The RBA aggressively raised interest rate rises three times at the start of the year with markets weighing a fourth increase by year-end. The tighter monetary conditions are expected to hit rate-sensitive companies in high-growth sectors such as technology and start-ups.
Betashares’ investment strategist Tom Wickenden said the impact was already being felt on the S&P/ASX 200 Index.
“Three RBA rate hikes in the half pushed inflation and unemployment back into focus, rewarding income and value over growth,” Wickenden told clients, referring to the different investment strategies from income-yielding stocks, to bargain buys, or companies that are prone to big market moves.
Adding to the woes of growth-focused investors were changes announced in the budget to capital gains tax. From next year, individuals selling assets such as shares and ETFs will pay tax on the total investment gain, adjusted for inflation. Under the current system, investors are only taxed on half of the gains, known as the 50 per cent discount.
“The proposed removal of the CGT discount added further uncertainty for households already absorbing higher borrowing costs, and the combination has weighed on consumer sentiment,” Wickenden added.
Betashares is not the only ETF provider to notice a rotation out of growth. Figures from GlobalX show inflows into index-based equity income ETFs surged to $309 million in June, resetting the record high notched just a month before.
The inflows eclipsed the $248 million that GlobalX said flowed into its broader-based Australian ETFs last month.
GlobalX investment strategist Marc Jocum said the shift into income-focused ETFs was a structural phenomenon that began late last year as investors started to tap into the ASX’s historically high dividend yield. But the flows got a marked boost from the changes announced in the budget.
“This trend likely has further to run,” he said. “It’s just reinforcing this policy – that a lot of people have described as economic vandalism – is actually impacting investor behaviour, and [encouraging them] to really focus and have a renewed appetite for tax-efficient income.”
Jocum said that the tax changes could ultimately impact corporate behaviour, too. So far, dividends and franking credits – which act as a tax credit for shareholders – have not been touched by the government but was something that corporates were taking notice of.
“Companies might change the way that they structure things to attract more capital,” he said. “They may be incentivised to pay out more dividends, to have higher franking credits.”
Jocum said investor appetite for income-generating assets was also reflected in the growing demand for debt-focused ETFs, like those invested in government bonds or corporate credit.
But tax changes and rate rises aside, investment firms said another key factor driving the switch into income was heightened sharemarket volatility, with investors wary ahead of next month’s reporting season and as war reignites in the Middle East.
“We’re seeing renewed interest in high-dividend strategies as Australian investors look for ways to manage uncertainty,” said Meaghan Victor, head of intermediary Asia Pacific at State Street Investment Management.
“The combination of regular income and the defensive nature of many dividend-paying sectors such as utilities, healthcare, consumer staples, and real estate can help cushion portfolios during periods of elevated volatility.”
Source: https://www.afr.com/markets/equity-markets/investors-pile-into-income-etfs-to-shelter-from-tax-changes-20260713-p60eqz