Over the last financial year, the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) has experienced strong growth as falling bond yields have surprised economic forecasters. The latest 12-month return number provided by Vanguard (as at May 31) is a solid 8.8%.
This may surprise some investors who remember reading about predictions early last year that bond yields would be heading higher. The popular opinion at the time was that the US Federal Reserve’s tightening of monetary policy may negatively impact the Australian bond market. The message was to temper/lower our expectations for returns from fixed-income investments such as VAF.
Don’t Get Whipsawed By Financial Market Predictions
The fact that VAF delivered solid returns to defy the relatively gloomy forecasts for the fixed interest sector is worth reflecting on. It is a reminder to take macroeconomic forecasts with a pinch of salt.
If you get tempted to act quickly on the latest financial guru’s economic prediction, take some time out and get away from your trading screen. That may well cure your temptation and allow you to think longer term, rather than what may perform over the next few months.
Are We Now Set For Lower Bond Yields?
After VAS has enjoyed such a good run over the last year the consensus views on bond yields appear to have changed. The articles I read now generally have a strong sense of complacency. They often suggest that yields could not possibly move higher over the next financial year.
Another sign of this complacency might be the money flowing into bond ETFs over 2019. This has been a global trend but is also noticeable with VAF. Looking at the securities outstanding announcements on this ETF — they are reflecting strong inflows. The VAF fund’s shares outstanding are more than 20% higher at the end of May compared with the start of the year.
Has The Money Flow Got It Right This Time With VAF?
In my experience investors are more likely to do more harm than good if they place too much focus on such questions.
A better approach might be to understand what asset allocation targets are suitable for your own circumstances. Avoid the noise of listening to contrasting predictions from the financial media. Consider occasionally rebalancing ETF holdings such as VAF if they move meaningfully away from your targets. That’s it.
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Disclosure: At the time of publishing, Steve Green does not own shares in the Vanguard Australian Fixed Interest ETF.
