VanEck Vectors Australian Subordinated Debt ETF

VanEck has launched a new exchange traded fund (ETF) which invests in Tier 2 capital, called the VanEck Vectors Australian Subordinated Debt ETF

VanEck says the ETF gives investors access to the Tier 2 Capital asset market, which is expected to exceed $50 billion over the next four years as the big four banks implement the Australian Prudential Regulation Authority's (APRA) new regulations that require them to double their Tier 2 Capital.

Tier 2 capital of the Australian banking system primarily consists of subordinated debt but can include other investments such as preference shares and hybrid instruments.

The ETF tracks the iBoxx AUD Investment Grade Subordinated Debt Index (SUBD Index), an index especially designed by credit index provider IHS Markit.

"As interest rates continue to hover at unprecedented low levels and with three rate cuts this year and another one anticipated, investors are being starved of 'risk-free' income from traditional sources such as government bonds and deposits," Arian Neiron, VanEck managing director and head of Asia Pacific, said.

"Australian investors are therefore going up the risk curve to higher yielding assets, such as subordinated bonds. As at 30 September the SUBD Index is yielding 2.4%, which is much higher than the average interest rate of 1.3% on 12-month bank term deposits available in September."