Australia’s ETF market closed 2018 at $40.41 billion in funds under management, with nearly half of all ETF cash flows going into international equity products, recent analysis by Vanguard global investment managers of ASX data has found.

Although market volatility did take its toll on the ETF market in the fourth quarter of the year, inflows over the course of the calendar year saw overall growth of 13.2 per cent from 2017.

Across the industry, cash flow was $6.44 billion for 2018, a drop from $8.08 billion in 2017.

However, in the past five years to 2018, ETF assets grew at a compound annual rate of 32 per cent.

Damien Sherman, head of ETF Capital Markets for Vanguard, said the figures are a positive indication that the market is continuing to grow despite volatile conditions.

“Continuing the trend of recent years, investors sought out ETFs that provided exposure to international equities, with the asset class attracting nearly half (49 per cent) of net cash flows in 2018,” Mr Sherman said.

“Despite the challenging investment conditions in 2018, investors continue to embrace the benefits of ETFs, spurring growth in the market, increased competition among issuers and rising trading volumes that have in turn driven down the cost to invest, allowing investors to keep more of the returns they earn.”

He said investors have shifted towards defensive assets in light of current market movements, evident as the Australian fixed income segment was the third-largest in terms of cash flow (at $1,277.6 million).

“Investors faced challenging conditions across global equity markets in 2018, highlighting the importance of diversification across asset classes and the enduring role that fixed income plays – especially as a ballast during periods of equity market volatility,” Mr Sherman said.

Vanguard soared to be Australia’s leading ETF issuer in 2018, with $12.07 billion in managed funds.

The global investment management company also led the industry for net cash flows in 2018, representing 41.5 per cent of ETF flows throughout the year.