With bank hybrids disappearing and dividend yields falling, Betashares says its new Australian Enhanced Credit Income Complex ETF offers a high-income, defensive alternative aimed at filling a growing gap in investor portfolios.
As declining dividend yields and the structural wind-down of bank hybrids tighten the supply of traditional income sources, investors are increasingly searching for substitutes that can preserve defensive positioning while still delivering stable, high-quality cash flow.
Betashares says APRA’s decision to phase out bank hybrids has accelerated this shift, triggering a surge of investors seeking appropriate alternatives.
The firm argues its new ASX-listed Australian Enhanced Credit (Geared) Complex ETF (ECRD) has been developed not simply as a hybrid replacement, but as a genuine step forward for the broader credit income landscape.
ECRD is designed to deliver a monthly income above what is typically available from existing bank hybrids, while targeting a lower volatility profile and maintaining investment-grade credit quality.
Betashares says ECRD increases investors’ income potential by lifting exposure to
underlying fixed income securities and seeking to earn a net interest margin, achieved through internal gearing at institutional borrowing rates.
Speaking on a webinar, portfolio manager Jing Jia said many investors are focused on addressing the growing income shortfall in their portfolios.
“In seeking to replace the high level of gross income that bank hybrids will leave behind once phased out, investors are left with no single ‘silver bullet’ alternative.
Traditional investment grade corporate bonds don’t offer enough yield, while private credit doesn’t meet many investors’ liquidity and credit quality requirements.”
He believes ECRD can form a core component of a credit income allocation and may suit investors looking for a high-yielding alternative to bank hybrids.
“Whilst it doesn’t offer franking credits (only shares will offer that after the hybrids phase-out), its cash yield currently exceeds the gross of franking yields of Australian bank hybrids.”
ECRD provides exposure to a diversified portfolio of investment-grade Australian bonds, combining floating-rate bonds issued by the big four banks with interest-rate-hedged corporate bonds to mitigate rate risk.
“ECRD hedges against interest rate risk by investing in only floating rate and interest rate hedged bonds,” the firm notes.
The fund employs leverage within a range of 300 per cent to 350 per cent, with the portfolio brought back to the midpoint of 325 per cent at the end of the day if exposure moves outside this band.
ECRD boosts income potential by expanding exposure to the underlying fixed income securities and earning a net interest margin via internal gearing at institutional borrowing rates.
Jia said that when assessing alternatives, the decision often comes down to balancing yield against liquidity and credit quality, particularly when comparing options on a franked-equivalent basis.
“On one end, you do have private credit, which can offer you the yield that you require … But then the trade-off is obviously, you have [an] illiquid asset class, and you also have typically lower credit quality,” he observed.
“Tier 2 bonds or investment corporate bonds do offer the liquidity and the credit quality but it doesn’t quite get easier on the yield. This enhanced credit income strategy, it actually ticks most of the boxes and in the most important ways.”
Investment strategist Tom Wickenden added that investors exiting hybrids are increasingly stepping up the capital structure.
“From all the conversations I’ve had with clients, I am finding them phasing out of bank hybrids. A lot of the investors have moved up the capital structure into T2 bonds – they do tick all those boxes, high credit quality, the liquidity .. but what investors have been sacrificing is that yield component.”
