What’s happening with Hybrids?
For many Australian income investors, bank hybrids have been a reliable portfolio staple for years. They’ve offered an attractive yield premium over cash and term deposits, regular distributions, and exposure to some of Australia’s largest banks.
For retirees, SMSFs and other income-focused investors, hybrids have often felt like a natural middle ground between cash/bonds and shares. But the landscape is changing and bank hybrids are gradually disappearing. In late 2024, the Australian Prudential Regulation Authority (APRA) confirmed that traditional bank hybrids will be phased out in Australia over time. APRA’s view is that these securities are no longer the most effective form of bank regulatory capital. In periods of financial stress, hybrids have proven more complex and less reliable than regulators would like. Global banking regulators have reached similar conclusions, and Australia is now following that path.
For investors, existing securities are progressively maturing and being redeemed or replaced with different forms of capital. All bank hybrids are expected to be refinanced by 2032.
Our alternative to hybrids: the Affluence Income Trust
We set the Affluence Income Trust up in 2023, as interest rates normalised to more attractive levels following the unnaturally low interest rate environment of 2015 – 2022.
The Affluence Income Trust targets monthly cash distributions equal to the RBA cash rate (currently 4.35%) plus 3% per annum. As you can see below, we’ve achieved that target distribution so far.
The current distribution rate for the Affluence Income Trust is in line with the target, at 7.35% per annum. Income is generated from a highly diversified portfolio of fixed income assets, with a focus on maximising returns with lower risk and volatility. And while there may be small changes in the unit price from month to month, the Fund targets preservation of capital over rolling 3 year periods after payment of distributions.
Diversification benefits
When you invest in hybrids, your returns are concentrated in one sector of the Australian market. You’re primarily exposed to the major Australian banks, which are in turn highly leveraged to the residential housing market.
The Affluence Income Trust is hugely diversified within the fixed income universe. It invests across a wide range of income focused funds and securities, some of which are not normally easily accessible to individual investors. This broad diversification reduces the risk of being exposed to a single issuer, sector, or asset class.
Comparing yields
As at May 2026, the Betashares Australian Major Bank Hybrids ETF (BHYB) reported a gross running yield of approximately 6.9% per annum. But this includes franking credits. The net (cash) running yield was approximately 4.9% per annum. That means a meaningful portion of the return from bank hybrids comes via franking credits, which are only accessible after the end of each tax year, rather than through cash paid directly into investors’ accounts.
The current cash distribution rate for the Affluence Income Trust is 7.35% per annum.
Most bank hybrids pay distributions quarterly. While this provides regular income, many investors prefer monthly cash flow that better matches household spending or pension drawdown needs.
Affluence Income Trust distributions are paid monthly, in cash, rather than a mix of cash and franking credits. That means the income is paid in full, regularly, without having to wait until after the end of the tax year to get the benefit of franking credits.
Differing risk profiles
While hybrids are often marketed as relatively safe, they do come with some risks. In our view, in addition to a lack of proper diversification, they have two potential weaknesses. First, since many are traded on ASX, their prices can fall during large market corrections. And secondly, in extreme conditions, they could potentially be converted into bank shares during times of financial stress, leaving investors exposed to equity risk when markets are weak.
The Affluence Income Trust is designed to manage risk differently. By blending investments across managers, strategies, and asset types, the Trust seeks to deliver consistent returns with lower volatility than equity markets, while still offering a higher income stream than most fixed income alternatives.
Comparing Hybrids and Affluence Income Trust
Here’s a side by side comparison of the key features of Hybrids vs the Affluence Income Trust.
| Feature | Bank Hybrids | Bank Hybrids |
| Current cash yield | 4.93% per annum average | 7.35% per annum |
| Current gross yield | 6.93% per annum average (including franking credits) | 7.35% per annum (typically minimal/no franking credits) |
| Distribution frequency | Usually quarterly | Monthly |
| Underlying exposure | Concentrated in major Australian banks. | Diversified fixed income across multiple sectors |
Final thoughts
Bank hybrids have served investors well. But with APRA moving to phase them out, many are beginning to ask what comes next. For those seeking attractive income, monthly cash flow and diversification beyond the banks, the Affluence Income Trust may be worth considering as an alternative to hybrids.
The Affluence Income Trust targets:
- Higher cash yields you can actually spend.
- More frequent (monthly) distributions, with reinvestment available.
- The potential for better total returns than hybrids over the long term.
- Broader diversification than just banks.
The Affluence Income Trust could be a compelling alternative to hybrids in your portfolio.
If you’d like to learn more about how the Fund works, visit our Affluence Income Trust page or contact us directly.
Disclaimer
This article is prepared by Affluence Funds Management Limited ABN 68 604 406 297 AFS licence no. 475940 for general information only and does not constitute investment advice. The content has been prepared without taking into account your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment in any Affluence fund you should consider the relevant Product Disclosure Statement or other disclosure document or continuous disclosure updates and the target market determinations available from Affluence. Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers do not guarantee the performance or success of any Fund, the repayment of capital, or any particular rate of capital or distribution return. Past performance is not indicative of future performance. There are risks associated with an investment in the funds. Affluence recommends you consult your professional adviser to determine whether the products offered by Affluence fit your objectives, financial situation or needs before deciding to invest. Some Affluence funds are only available to eligible investors.
