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19 February 2025
APRA’s recent decision to phase out hybrid securities has left many investors grappling with the question of how best to replace their hybrid exposure – and fixed income active ETFs could be the answer.
APRA has confirmed it will phase out the use of Additional Tier 1 (AT1) or hybrid securities issued by Australian banks. These will mostly be replaced by Tier 2 (T2) or subordinated debt in their capital structure in a move aimed at strengthening and simplifying the banking and financial system, particularly during periods of crisis.
Accordingly, we don’t expect there will be a new issuance or rolling replacement of any major bank hybrid securities - so if you currently invest in hybrid securities, you may be looking to find alternative solutions.
Hybrid securities offer higher yields in comparison to term deposits, traditional fixed income and in some cases shares, making them attractive to investors. Now, with hybrids being phased out, many investors are left wondering how they can replace this.
But the headline yield or income is only part of the story. When considering alternatives, investors should evaluate the expected risk, cost and liquidity (ability to get in and out of the investment) of an investment, as well as other investment features.
Solutions across cash, fixed income and equities may offer suitable alternatives to hybrid investors. Many investors are turning to fixed income ETFs, given they trade like shares on a stock exchange and can offer regular income.
To help investors, especially those looking for what to do next with their hybrid allocation, Macquarie Asset Management now offers a range of fixed income active ETFs. Some of these ETFs hold instruments with similar attributes to hybrid securities, as well as providing some additional potential benefits like greater diversification.
One vital attribute is that the ETFs offered by Macquarie are actively managed, which is an important part of fixed income investing – especially when you consider the complexities of evaluating bonds. Active management also means that instead of passively tracking an index, your portfolio manager can respond to market shifts with the aim of achieving the best market outcome and protecting against downturns.
As APRA is requiring banks to replace hybrids with mainly subordinated debt, this is likely to be the closest – and most appealing – substitute for investors."
Subordinated debt may not offer franking credits, but it does typically offer solid yield and regular income, with lower capital risk compared to hybrids or equities, and generally a higher level of protection for investors. Learn more about subordinated debt and the benefits.
However, there is one hurdle to overcome. These types of bonds don’t trade on the stock exchange, making subordinated debt harder to access unless you’re an investment manager or institutional investor.
Macquarie Asset Management has launched the Macquarie Subordinated Debt Active ETF (ASX: MQSD), which being an ETF is tradable on the ASX, providing access to a range of subordinated debt securities and may help cater to the needs of investors looking to replace their hybrid exposure. MQSD offers the potential for attractive yield and regular income from a portfolio of predominately Australian banks and other financial institutions. An active ETF like MQSD gives you access to a wide range of bonds - diversifying your risk away from one bank or specific hybrid, while you benefit from the professional management of one of Australia’s largest and most experienced active asset managers.
Although not a like for like replacement, if you are looking to replace your hybrids with an investment that aims to offer maximum yield, the Macquarie Global Yield Maximiser Active ETF (ASX: MQYM) could be an option. MQYM provides exposure to high yielding credit opportunities as it seeks to boost portfolio yield and deliver higher levels of monthly distributions than cash and traditional fixed income investments. As an active ETF, it also provides daily liquidity as well as transparency of holdings - features that other high yielding credit, such as private credit, cannot provide.
With the changes made by APRA, it is likely no new bank hybrid securities will be available for investors, with bank hybrids to be completely phased out by 2032. Investors have the option of continuing to hold their existing bank hybrids until their call date or maturity and may be considering how they want to reallocate the hybrid portion of their portfolio when the time comes, particularly if they are seeking to generate a similar level of income as that offered by bank hybrids. It is important for investors to remain cautious and understand the risks involved with alternative investments which may be more complex and lack transparency. Fixed income ETFs, especially active fixed income ETFs, may offer a potential solution for these investors and, like hybrids, they are also tradeable on a stock exchange.
Compare one of our fixed income active ETFs and the typical characteristics of a hybrid security here:
When considering replacements for hybrids in your portfolio, think about why you held hybrids and what you want from an alternative solution.
Here are some general questions to consider. It is important to note that these are general questions only, and do not take into account specific needs or objectives of investors. For tailored advice based on your circumstances please seek financial advice.
Hybrids are ASX listed securities, but their closest replacement in bank-issued Tier 2 bonds, are not available on the ASX. If you prefer the speed and ease of access offered by ASX-traded securities, fixed income active ETFs could provide a simple solution, with the added expertise of professional asset managers.
Investing through a stock exchange generally also gives you daily liquidity, intraday pricing and transparency through to the underlying holdings.
Hybrid securities in Australia have historically provided exposure to an Australian major bank or financial services company. Fixed income active ETFs may offer similar exposures. For example, MQSD offers an actively managed portfolio with significant exposure to subordinated debt issued by Australian major banks and other financial institutions. Fixed income active ETFs can provide other benefits – like diversifying across issuers, maturities, credit ratings and capital structure, all with the ease of trading like shares on a stock exchange.
Think about your risk appetite for all investments - including volatility, rank in capital structure or credit worthiness. In the capital structure, hybrids rank below senior or subordinated debt, but above equity. The higher a security ranks, the lower the risk and the higher the level of protection and priority of payment in the event of insolvency, compared to securities below it. As such, a portfolio of predominately subordinated debt, like MQSD, can provide greater capital protection and lower risk than hybrids.
Active ETFs managed by Macquarie Asset Management also offer the benefit of being backed by the expertise of one of Australia’s largest and most experienced asset managers. This means every exposure is thoroughly researched by a team of experts, aiming to manage risk whilst seeking alpha opportunities.
Forecasting expected future returns from investments can be difficult, as past performance is not an indicator of future performance. Broadly, investors should generally be compensated for a higher level of risk with a higher level of return. A common way to estimate future returns is to compare yields on fixed income securities or funds. But this is not necessarily the actual return you can expect to receive.
Macquarie offers a range of active ETFs, like MQSD and MQYM, designed to help investors access the potential for attractive yields through professional active management, all within an easy-to-access ETF.
All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short term).
The risks of investing in the Macquarie Subordinated Debt Active ETF include:
Investment risk: The Fund seeks to generate higher income returns than traditional cash investments. The risk of an investment in the Fund is higher than an investment in a typical bank account or term deposit. Amounts distributed to unitholders may fluctuate, as may the Fund’s NAV unit price, by material amounts over short periods.
Manager risk: There is no guarantee that the Fund will achieve its performance objectives, produce returns that are positive, or compare favourably against its peers, or that the strategies or models used by the Investment Manager will produce favourable outcomes.
Income securities risk: The Fund may have exposure to a range of income securities. The value of these securities may fall, for example due to market volatility, interest rate movements, perceptions of credit quality, supply and demand pressures, a change to the reference rate used to set the value of interest payments, market sentiment, or issuer default.
The risks of investing in the Macquarie Global Yield Maximiser Active ETF include:
Investment risk: The Fund seeks to generate higher income returns than traditional cash investments. The risk of an investment in the Fund is higher than an investment in a typical bank account or term deposit. Amounts distributed to unitholders may fluctuate, as may the Fund’s NAV unit price, by material amounts over short periods.
Manager risk: There is no guarantee that the Fund will achieve its performance objectives, produce returns that are positive, or compare favourably against its peers, or that the strategies or models used by the Investment Manager will produce favourable outcomes.
Income securities risk: The Fund may have exposure to a range of income securities. The value of these securities may fall, for example due to market volatility, interest rate movements, perceptions of credit quality, supply and demand pressures, a change to the reference rate used to set the value of interest payments, market sentiment, or issuer default.
More information on the risks of investing in the Fund is contained in the Product Disclosure Statements for the Fund, which should be considered before deciding to invest in the Fund.
Important information
The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
The Macquarie Global Yield Maximiser Active ETF is a separate class of units in the Macquarie Global Yield Maximiser Fund (ARSN 094 159 501). A separate class of units is not a separate managed investment scheme.