Some ETFs track the performance of certain commodities or sectors. And some of those sectors or commodities have suffered amid high inflation and interest rates.

But that hasn't been an issue for fixed-income ASX ETFs over the past year.

Some track bank deposit rates and others are known as bond ETFs. These exchange-traded funds hold a collection of various bonds, either corporate or government.

Now, most of these underperformed during the 18 months or so of global interest rate tightening. But now that rates in the United States and even Australia have likely topped out and are expected to begin coming down in late 2024 or 2025, the picture is changing.

What's happening with fixed-income ASX ETFs?

According to Australian ETF provider Global X, "higher interest rates have put the 'income' back in fixed income".

Global X noted that "A challenging climate has triggered investors to opt for more low-cost investment options that offer reliable returns … without taking on the higher volatility and market risk from conventional stocks."

The company said the rising popularity of fixed-income ASX ETFs, currently valued at some $28 billion, now sees these constitute 14% of the total Australian ETF market.

"An impressive $6.5 billion was invested into fixed income ETFs in 2023, representing 43% of the total market flows, the highest proportional level recorded," Global X said.

Its analysts reported that, for the first time, inflows into fixed-income ETFs in 2023 were on par with those into equity ETFs.

And with interest rates likely to begin easing over the next two years despite some sticky inflation issues, that could see some stronger performance from bond ETFs.

Why?

According to Global X:

Since fixed-rate bond coupons have an inverse relationship with interest rates, lower interest rates could make existing fixed-rate bonds more attractive, potentially leading to higher prices and capital gains for investors.

Two fixed-income exchange-traded funds to consider

There is a sizeable and growing basket of ASX ETFs focused on the fixed-income space.

Two that you may wish to consider are the Betashares Australian Investment Grade Corporate Bond ETF (ASX: CRED) and the iShares Core Composite Bond ETF (ASX: IAF).

As of 30 June, IAF returned 3.7% over the prior 12 months. That's after fees and includes the quarterly dividend payments.

As of 28 June, CRED has returned 8.8% over the prior 12 months, including post-fee and the monthly dividend payouts.

Looking to the 24 months ahead, both ASX ETFs could benefit if global interest rates begin to ease. This would increase the appeal of the higher-yielding, longer-term bonds these funds hold.

The post Why high interest rates are seeing investors flock to these ASX ETFs appeared first on The Motley Fool Australia.

So, what's the appeal?

Let's investigate.

Why are investors loving fixed-income ASX ETFs this year?

ASX ETFs, which provide exposure to a basket of assets, have been popular for a number of years now.

Their key benefit is providing instant diversification in a single trade.

There are many types of ETFs covering many different asset classes.

One of those asset classes is bonds, and this is what fixed-income ETFs are all about.

A fixed-income ASX ETF gives investors exposure to a diversified basket of bonds.

A bond is like a tiny slice of a large loan pie.

They are used by corporations and governments as a way to borrow funds from many investors for a specified period.

During that period, they promise to pay interest at a set rate, before returning the capital to the investors in full at the end of the specified period.

Bonds typically pay a higher rate of interest than savings accounts. That's how organisations attract investors. If they didn't pay a higher rate, then conservative investors would just leave their cash in the bank.

Say you buy a 10-year bond with a coupon or interest rate of 5%, and it costs you $10,000.

You'll then receive your coupon payments periodically — usually twice per year — and in 10 years' time, you'll get your $10,000 back.

You can also sell your bonds during that 10-year period if their market value goes up.

Bonds are considered a safe-haven asset for investors in times of economic uncertainty, like now.

Bond prices tend not to fluctuate as much as share prices, and the coupon payments provide a predictable passive income stream.

Buying a fixed-income ASX ETF gives investors exposure to a bunch of bonds, thereby spreading the risk.

New ASX data reveals the best-performing fixed-income ETFs for total returns over the year to 31 August.

The top 5 fixed-income ASX ETFs

According to the data, here are the top five fixed-income ASX ETFs today:

The VanEck Australian Subordinated Debt ETF (ASX: SUBD) has delivered a 6.34% total return over the past 12 months. This includes reinvested dividends with a historical yield of 4.62%.

The iShares Government Inflation ETF (ASX: ILB) has delivered a 5.44% total return over the past 12 months. This includes reinvested dividends with a historical yield of 1.02%.

The BetaShares Australian Investment Grade Corp Bond ETF (ASX: CRED) has delivered a 5.15% total return over the past 12 months. This includes reinvested dividends with a historical yield of 4.57%.

The Betashares Australian Major Bank Hybrids Index ETF (ASX: BHYB) has delivered a 5.14% total return over the past 12 months. This includes reinvested dividends with a historical yield of 4.58%.

The iShares Global High Yield Bond (AUD Hedged) ETF (ASX: IHHY) has delivered a 5.02% total return over the past 12 months. This includes reinvested dividends with a historical yield of 4.11%.

The post Fixed-income ASX ETFs are all the rage. Here are the top 5 performers appeared first on The Motley Fool Australia.