VanEck will tomorrow list a new fixed income ETF that capitalises on APRA's expanded capital requirements for big banks, to deliver investors yield north of 2%.
The VanEck Vectors Australian Subordinated Debt ETF (ASX: SUBD) will hold a portfolio of investment grade subordinated debt issued in AUD by Australia's largest financials.
Australia's subordinated debt market currently stands at roughly $60 billion. It is expected to continue to grow as the big banks issue more tier 2 capital to meet APRA's expanded requirements for total capital.
The portfolio currently has 12 positions and an average credit rating of BBB+.
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The index on which it is based was returning 2.4% at September end, the company said.
VanEck has priced the ETF at 0.29% p.a. in fees.
"This is for investors who are looking for higher yield than traditional cash, term deposits, government bonds and traditional bonds and are willing to take on some additional risk," VanEck director of investments Russell Chesler said.
"Subordinated bonds have higher yield and higher risk than traditional floating rate bonds.
"But those issued by the big four banks are still investment grade and are lower risk than shares (tier 1 capital) and hybrids (additional tier 1 capital), as subordinated bonds are paid after unsecured debt holders and traditional bonds," Chesler said.
Its biggest holding is in Westpac 08/29's which have a weighting of 20.3%.
The ETF tracks the the iBoxx AUD Investment Grade Subordinated Debt Index, created by Markit. It caps the weight of each holding at 25% (meaning at the least, the portfolio will have four holdings) and rules out smaller issuers of subordinated debt for liquidity.
In July, APRA told big banks and insurers to increase their total capital by three percentage points by 2024, to cushion against a failure. At the time the prudential regulator said it expected banks would meet the bulk of this requirement by issuing tier 2 capital.