Trust Preferred Securities (TruPS): 2025 Guide for Australian Investors

Trust Preferred Securities (TruPS) have long been a niche but intriguing investment option, sitting at the intersection of debt and equity. While most commonly associated with US bank capital, TruPS have implications for global investors—including Australians—especially as financial markets adapt to new regulatory and economic realities in 2025.

What Are Trust Preferred Securities?

TruPS are hybrid securities created by US bank holding companies, typically structured as subordinated debt issued to a trust, which then issues preferred shares to investors. The resulting instruments blend characteristics of both bonds and shares:

• Fixed or floating distributions: Like bonds, TruPS pay regular interest (often quarterly).

• Subordination: They rank below senior debt but above common equity in a bank’s capital structure.

• Call features: Issuers can often redeem them early, typically after five years.

• Tax advantages: US issuers have historically benefited from tax-deductible interest payments.

For Australian investors, TruPS can be accessed via global fixed income funds or certain listed investment companies (LICs) with international mandates.

2025 Regulatory and Market Developments

TruPS were a hot topic after the Global Financial Crisis, as regulators worldwide—including APRA in Australia—tightened the rules on what qualifies as Tier 1 bank capital. In the US, the Dodd-Frank Act and subsequent Basel III reforms phased out TruPS from counting as core regulatory capital for large banks. However, many smaller institutions still have legacy TruPS outstanding, and they continue to trade in secondary markets.

Key 2025 developments relevant to Australians include:

• Rising global rates: Central banks, including the RBA and US Federal Reserve, have maintained higher-for-longer rates. This has increased yields on many legacy TruPS, though it also raises refinancing risk for issuers.

• Heightened scrutiny of hybrid securities: In the wake of 2023–24 banking sector volatility, regulators have flagged the complexity and potential risks of hybrids, especially for retail investors.

• Australian banks’ capital stack: While Australian banks do not issue TruPS, they offer similar instruments like capital notes and hybrids. Comparing TruPS to local hybrids helps investors understand risk and return profiles across markets.

For example, while CBA’s latest capital notes offer yields around 6% (as of mid-2025), select US TruPS can yield 7–8%, reflecting additional risk and currency exposure.

Risks and Opportunities for Australian Investors

TruPS present several opportunities—but also notable caveats:

• Income potential: Yields can be attractive compared to traditional bonds or local hybrids, especially in a higher-rate environment.

• Diversification: TruPS may provide exposure to US regional banks or other sectors not well represented on the ASX.

• Call and extension risk: Many TruPS are callable, and issuers might delay redemption if market rates remain high—potentially locking investors into below-market yields over time.

• Complexity: TruPS are not as straightforward as ordinary shares or term deposits. Features like deferrable interest payments, subordination, and cross-border tax treatment add layers of risk.

• Liquidity: Since TruPS are primarily US-market instruments, secondary market liquidity may be limited for Australian investors, especially if held via offshore brokers or less-liquid managed funds.

Example: In early 2025, several US regional banks with legacy TruPS outstanding saw their securities rally as investors bet on sector recovery. However, some TruPS experienced price swings of 10–15% in a matter of weeks, underscoring their volatility compared to vanilla bonds.

How to Access TruPS from Australia

Direct access to individual TruPS is typically limited to sophisticated investors using global brokerage platforms. For most Australians, the most practical way is through international fixed income ETFs or managed funds that allocate a portion of their portfolio to bank hybrids, including TruPS. Some diversified income LICs also hold a small allocation as part of their global credit strategy.

• Check the fund’s holdings: Look for mention of “trust preferred securities” or “US bank hybrids” in product disclosures.

• Assess fees and currency risk: Many global bond funds are unhedged, so AUD/USD fluctuations will affect returns.

• Review liquidity: Ensure that the fund or ETF provides daily liquidity and transparent pricing.

Popular options in 2025 include the iShares International Preferred Stock ETF (PFF), which holds a mix of US preferreds and TruPS, and the JPMorgan Global Income Fund, which selectively invests in hybrid securities worldwide.

Conclusion

Trust Preferred Securities may be a niche corner of the fixed income universe, but they offer unique risk and reward characteristics for Australian investors willing to do their homework. With rising rates and increased scrutiny of hybrids, understanding the mechanics of TruPS—along with their place in a diversified portfolio—has never been more important. For those considering exposure, review your risk tolerance, seek out reputable global funds, and keep an eye on regulatory updates in both the US and Australia.