In a world without bank hybrids, what’s next for income investors?

18 June 2026

5 mins read

As bank hybrids are gradually phased out, many investors are seeking new ways to generate reliable income from familiar, high-quality issuers, like Australia’s major banks. But what investment has the potential to provide attractive yields, income generation and capital preservation?
 

Hybrids are being phased out, subordinated debt is stepping in

For many investors, bank hybrids provided a great way to access income, in well-known and trusted banking names and, perhaps most importantly, were easily accessible on the ASX. The income was also floating rate, tied to interest rates, which again felt intuitively positive for investors. However, hybrids are being phased out, so understandably many investors are asking: what comes next?

With that backdrop, investors are looking for alternatives and subordinated debt is emerging as a top option due to its nature as a typically defensive, higher-yielding asset class, that sits at the sweet spot between income generation and capital preservation. It can provide some of the highest yields in Australia's public fixed income market, while still offering exposure to high-quality issuers like Australia's major banks.

Once a small corner of the market, the Tier 2 market has grown almost 4x in less than a decade, from $44.2 billion in 2017 to $173.7 billion in 2026¹, with further growth expected as banks transition from hybrids to Tier 2 capital. Investor demand has kept pace, with primary market deals on average four times oversubscribed in 2025.

That demand is increasingly global. Australian subordinated debt offers compelling all-in yield, attracting offshore buyers, particularly from Asia. The result is a deeper, more diverse and more liquid market for Australian investors. Read more on how the major banks are responding to this growing market demand.

How can investors be confident they’re optimising income potential?

Whilst subordinated debt seems like a good alternative on paper, by itself, it is not ASX-listed, and therefore many investors cannot access this style of fixed income. Thankfully, ETFs can help.

ETFs give investors the ability to gain exposure to asset classes or parts of the market previously difficult to access. In this case, accessing subordinated debt is as simple as buying and selling hybrids on the ASX, via a subordinated debt ETF. One of the benefits of ETFs is diversification – getting a multitude of securities in one holding. For investors replacing hybrid exposure, an ETF such as the Macquarie Subordinated Debt Active ETF (ASX: MQSD) provides exposure to a diversified portfolio of subordinated debt securities, predominately from Australian banks and other financial institutions, with the potential for attractive yields and regular income.

MQSD can deliver similar risk and return characteristics while diversifying risk away from any single bank or security. And because it’s actively managed, investors gain access to one of Australia's largest and most experienced fixed income managers with the flexibility to navigate changing market conditions.

Active management has the potential to outperform

One vital attribute of Macquarie’s ETFs is that they are actively managed, which is an increasingly important part of fixed income investing, especially when you consider the complexities of evaluating bonds (especially compared to share investing).

Passive fixed income ETFs track indices that tend to be weighted towards the most indebted issuers – and these issuers are not necessarily the most creditworthy. This is in stark contrast to equity indices which typically weight to the most valuable companies.

Active fixed income managers are at their core dynamic and, depending on the market, can adjust allocations towards higher-quality issuers and avoid those at risk for downgrades, with the aim of improving risk adjusted returns and protecting against downturns. If the credit environment deteriorates, they can increase liquidity via a range of methods not available to passive players. The importance of this cannot be overstated as fixed income, whilst designed to help generate consistent income, is also intended to play a defensive role in a portfolio.

Active managers can also evaluate a much wider pool of investable securities. Macquarie’s fixed income team scrutinise the quality and repayment ability of issuers and assess which exposure they think will provide the most attractive risk-adjusted returns – across every bond in the investable universe.

For example, MQSD has access to the entire subordinated debt investable universe – in Australia and globally. That’s a level of diversification passive ETFs in the space cannot match, with many only tracking around 20% of securities in the subordinated debt investible universe. Passive subordinated debt indices are limited by size, security type and currency of issue, and therefore the ETFs that track them are obligated to invest based on the index’s pre-set rules.

In this instance, the broader universe is all AUD issued subordinated debt and hybrid securities issued in 2025. Passive benchmark inclusion is estimated based on the publicly available index methodologies.

Source: Bloomberg