Betashares launches ‘big four’ bank debt ETF

Exchange traded funds (ETF) specialist manager Betashares has today launched a dedicated ‘big four’ bank subordinated debt ETF on the Australian Securities Exchange (ASX).

The new fund, the Betashares Australian Major Bank Subordinated Debt ETF (BSUB), provides exposure to “high-quality Tier 2 floating rate subordinated bonds” issued by Australia’s ‘big four’ banks – the Commonwealth Bank of Australia (CBA), Westpac, NAB, and ANZ.

Eligibility for the BSUB requires bonds to have at least $500 million outstanding and a remaining maximum term to maturity of 10 years.

While similar to traditional bonds, subordinated debt, otherwise known as junior securities, is an unsecured loan or bond that ranks below other more senior debt but above ordinary shares for claims on assets or earnings – that is, in the case of a borrower default, creditors who own subordinated debt will not be paid out until after senior bondholders are paid in full.

Subordinated debt has become increasingly important for Australian banks, constituing the essential (Tier 2) capital buffer that is required of them by the prudential regulator to absorb potential losses in a period of financial distress.

According to Betashares, these Tier 2 floating rate subordinated bonds “offer attractive income potential, typically delivering returns above that of senior bank floating rate notes, along with a high degree of capital stability”.

The firm added: “At the same time, the income paid by these bonds varies in line with benchmark interest rates, offering protection against rising interest rates.”

Betashares chief executive Alex Vynokur said the asset manager was “excited to launch BSUB as we continue to broaden the range of investment options available to Australian investors and their financial advisers”.

Betashares boasts that BSUB offers investors monthly income, “typically above that of senior bank floating rate notes”, a high degree of capital stability, along with potential portfolio diversification benefits due to Tier 2 floating rate bonds, “which historically exhibit a low correlation to equities”.

The launch of BSUB expands Betashares’ range of cash and fixed income ETFs to a total of 19 investment solutions.