Due to the flight to stability amid global trade and geopolitical uncertainty, fixed income was the anchor allocation for Australian investors in 2025 which was record-breaking year for the asset class.
Given that market volatility remains at elevated and structurally higher levels in 2026, the lurch in fixed income is expected to remain high, while the new investing regime characterised by higher inflation is likely to give it an extra kicker.
Bottom line is, the way Australian investors are accessing their fixed income exposure is materially impacting how bond markets function.
While total net inflows into managed fund fixed income strategies reached $17.3 billion, those choosing access to fixed income via ETFs have gone through the roof.
Within the ETF sector specifically, fixed income attracted between $11.6 billion and $14 billion in record inflows, nearly doubling the previous year's result.
What’s clearly evident from bond ETF turnover is that investors are increasingly turning to ETFs when traditional fixed income markets struggle to function properly.
It appears that fixed income ETFs are outpacing the traditional bond market primarily due to their role as a pressure valve offering a critical layer of "secondary liquidity”, faster portfolio adjustments, cost efficiency, and the democratisation of access to complex bond sectors.
This was most evident within the Australian market at the height of the sell-off from April 2025, when the market witnessed ETF turnover surge more than fivefold.
As well as helping to unlock capital in otherwise illiquid investments, secondary liquidity also offers greater real-time pricing discovery when underlying bonds and illiquid assets stop trading altogether.
In early 2026, these vehicles surfaced as the preferred tool for navigating a volatile interest rate environment, with some bond ETFs capturing around a third of the entire bond-fund market share.
According to State Street’s APAC fixed income ETF strategist, Marie Tsang, recent structural changes in bond markets, along with evolving investor behaviour, are the catalyst fixed income ETFs have needed to offer all-important scale.
“Bond markets have evolved and become a lot more transparent and liquid. But, for a lot of the market, it still does trade over the counter," said Tsang.
“The fact that the ETF as a vehicle, as a unit holding can be traded itself, means that oftentimes you can find a little bit more liquidity and that transaction costs can be reduced when you compare that to an equivalent investment in a managed fund."
By comparison, Tsang reminds investors that their ability to trade without forcing the buying or selling of underlying securities has made ETFs more cost-efficient than traditionally clunky bond funds – and increasingly central to price discovery in markets where liquidity is thin and transparency limited.
In other words, an ETF can sidestep the friction that’s most evident during periods of market stress.
The net affect this is that when volatility spikes and cash bond markets risk seizing up, trading in fixed income ETFs typically accelerates rather than retreats.
“In a case of ETF, that can just change hands between investors, without the underlying bonds needing to be bought or sold at all – that’s a benefit of the ETF vehicle, especially when you apply to bonds as an asset class compared to equities, which the underlying stocks are already exchanged, traded and have a lot of transparency,” she said.
Here in Australia, bond ETFs account for around 2% of Australian dollar-denominated bonds, underscoring both their growing influence and their long runway for future upside.
“ETFs really punch above their weight – it is a small portion of AUM, but ETFs do trade a lot when you compare it with the underlying bonds… I think we have a long way to go in terms of growth of the bond ETF space in Australia.”
According to a State Street white paper released in October 2025, fixed income trading is undergoing a fundamental transition, with new protocols, like portfolio trading and electronic exchanges, offering more efficient ways to access liquidity.
Tsang also notes the uptake of fixed income ETFs by institutional investors as a ‘liquidity sleeve’, allowing them to easily go into or out of exposures without suffering a lot of transaction costs.
