VanEck Australia has launched a new ETF – the VanEck Vectors Australian Subordinated Debt ETF (SUBD AU) – on the Australian Securities Exchange.

Subordinated debt offers higher yields, with greater risk, compared to traditional bonds.

The fund is linked to an index from IHS Markit that provides exposure to investment-grade subordinated bonds denominated in Australian dollars.

It is the first ETF in Australia to specifically target the subordinated bond market.

Subordinated bonds are unsecured loans that rank below senior loans or securities with respect to claims on assets or earnings.

In the case of borrower default, holders of subordinated bonds will only be paid once all other corporate debts are repaid.

Due to the increased risk, subordinated bonds typically offer higher yields compared to traditional bonds and may appeal to income-hungry investors who are willing to bear the additional risk.

The fund currently has a running yield of 3.02%, and distributions are made to investors on a monthly basis.

Methodology

The fund’s index is the iBoxx AUD Investment Grade Subordinated Debt Index.

The index only includes AUD-denominated floating rate bonds issued by financial institutions that qualify as Tier 2 Capital under the relevant APRA standards (or equivalent foreign rules).

As the index only includes floating rate securities, it has negligible duration risk.

To enter the index a subordinated bond must have at least AUD500m outstanding face value, an iBoxx credit rating of investment grade, and a time to maturity of at least two years. The index is weighted by market value outstanding and rebalanced on a monthly basis.

The ETF comes with an expense ratio of 0.29%.