VanEck expands ETF range with new FSUB debt product

The intensifying search for reliable income streams is driving sophisticated investors toward defined debt products, and VanEck is capitalizing on this demand with the launch of the Australian Fixed Rate Subordinated Debt ETF (FSUB) on the ASX this Friday.

This strategic offering addresses both evolving regulatory mandates and a strong market appetite for predictable, high-nominal yields within Australia’s credit landscape. FSUB is specifically designed to capture a significant portion of the market currently favoring fixed-rate exposure and defined duration characteristics over floating-rate alternatives.

FSUB is intended to complement VanEck’s existing and highly successful VanEck Australian Subordinated Debt ETF (SUBD). While SUBD, launched in 2019, provides investors with direct access to floating-rate subordinated bonds, primarily issued by Australia’s major financial institutions, including the “big four” banks, FSUB provides the crucial fixed-rate exposure within the same regulatory capital framework.

This dual offering allows investors to fine-tune their interest rate risk exposure while maintaining access to attractive credit spreads offered by subordinated debt. The success of the underlying asset class is evident in SUBD’s rapid growth, which has attracted more than $1 billion in net flows in the most recent fiscal period and now manages over $3 billion in total assets.

The fundamental market shift away from traditional income sources is heavily influenced by prudential regulation. For years, investors relied on bank hybrids for yield; however, these instruments are undergoing a regulatory phase-out. Bank hybrids often constituted Additional Tier 1 (AT1) capital, which features complex loss-absorbing mechanisms, such as conversion to equity or write-down, triggered when the issuer’s capital levels fall below a specific threshold.

Following the global financial crisis and the implementation of Basel III reforms, regulators worldwide, including the Australian Prudential Regulation Authority (APRA), have tightened requirements around the eligibility and structure of these capital instruments, accelerating their retirement from the institutional market.

Consequently, the market is rapidly migrating toward Tier 2 subordinated debt, a segment that VanEck estimates has already surpassed $70 billion in size and continues to expand rapidly. Tier 2 debt is considered higher quality capital than AT1 hybrids, ranking above hybrids and equity in the capital structure. While subordinated to senior unsecured debt, Tier 2 bonds offer a defined maturity date and generally carry lower risk than AT1 instruments, making them highly appealing to institutional and wholesale investors seeking defined duration and income certainty.

The introduction of FSUB is fundamentally an optimization strategy responding directly to mandates from the Australian Prudential Regulation Authority (APRA). APRA’s implementation of the Total Loss Absorbing Capacity (TLAC) requirements for Authorized Deposit-taking Institutions (ADIs) is the primary driver of the sustained supply of Tier 2 debt. TLAC is a key regulatory framework designed to ensure that globally systemic important banks (G-SIBs), which include Australia’s major banks, maintain sufficient resources that can be “bailed-in” to absorb losses and recapitalize the institution during a crisis, thereby avoiding taxpayer bailouts.

These stringent TLAC requirements necessitate continuous Tier 2 issuance. Arian Neiron, chief executive and managing director of VanEck Asia Pacific, noted that APRA’s mandated TLAC requirements are driving continued Tier 2 issuance estimated at approximately $15 billion per year. This consistent supply ensures liquidity in the market and provides a steady stream of investment opportunities.

Financial institutions have strategically shifted their Tier 2 capital issuance to encompass both floating and fixed-rate structures to accommodate the increased investor appetite for defined income and varied duration exposures. The launch of FSUB completes VanEck’s subordinated debt solution, offering investors a choice between the stability of fixed coupons and the protection against rising rates offered by floating coupons.

The timing of FSUB’s launch is particularly strategic given the current macroeconomic environment. Subordinated debt, which typically offers a yield premium over senior debt due to its subordinate ranking in the event of insolvency, is highly attractive when traditional fixed income yields are elevated.

Neiron highlighted that with the Australian yield curve steepening recently and the 10-year bond yield reaching a 12-month high, FSUB is well-positioned to capitalize on market conditions. The ETF is expected to offer investors access to a fixed-rate bonds portfolio currently yielding around 5.7 per cent, representing a compelling income