Today I am trying to compare between ETF bond investments and an investment with Lendix. I do that to get an idea how p2p loans perform in comparison to high yield and corporate bonds. I’d hoped to get some clues if the ETF bond investments could be replaced by p2p loan investments. Beforehand, the comparison is not as fair as it should be as I had to guesstimate some datapoints, so a part of it is comapring apples and oranges. Following some factors which are not congruent and therefor make it hard to be compared. Nonetheless I am convinced the benchmark gives some insights.
What you should consider while reading this comparison
Lendix funded its first loan in March 2015, this means the loan portfolio started from scratch and could only been built over time, contrary to an ETF where you can invest once to hold. This increases the difficulty to match the yields, as I would need to time wheigh them, what I can’t given the data available. From a risk profil high yield bonds are the most comparable to Lendix loans, although they are not exactly the same segment. Most of the borrowers would not be able to emit a quoted bond. The regional distribution is different, as Lendix only offers French loans (I excluded Spanish and Italian loans from this comparison due to their youth which would dillute my results). The analysed ETF have a broader regional segmentation. France counts for about 15 and 20% of the ETF’s regional allocation. A sectoral comparison is hard due to the fact that the ETF provider allocate the sectors differently. In the ETF the banking sector accounts for about 1/5 of the total portfolio, whereas on the other side Banks are nearly not existant at Lendix. As the oldest Lendix loans only are running for 2.5 years I guess the default rate is a little to low at the moment. Further: Quoted bonds react on shifts of the yield curve. Is the curve shifting up the bond prices go down (interest goes up), as the yields adapt to the new interest rate environment. This results in an increase in yield to maturity. Contrary when the yield curve shifts down the bond prices soar and the yield to maturity gets smaller. This does not happen to Lendix loans as they are not quoted or tradeable at an exchange. This can be an advantage (decreasing interest rates) or a disadvantage in case of increasing rates. Only newly added loans are affected as they orient at the current interest rate level. Ok this is a little bit generalized, but it works like this more or less. Of course there are other parameters which influence the bond prices to a certain degree in yield shifts. There is , for example, the duration. Loans with longer durations tend to react more sensitive to shifts in the rates then shorter ones. Higher coupon bonds tend to be less sensitive. But now enough with the theoretical approach, I could write many blog posts about this only 😉
Und jetzt zum Vergleich…
According to Lendix’ stats the average yield is 6.44% (but I can’t copy this value one to one due to the reasons mentionned earlier). Firstly I have lessend the yield because of the defaults by number (3.07% of the loan number were in default), which brings me (ok, not 100% correct I know) to 6.44% x (100% – 3.07%) = 6.23% p.a yield after defaults.
This per annum yield I have lessend in the first image with 2 percent for the first year and 1 percent for the second, after that I have used the 6.23 percent p.a yield. As I passed on calculating monthly yields the Lendix line is stepped with a yearly recalculation (=addition of the yield, yes, no multiplication here). I am aware that not everything is 100% correct, but as I said earlier…. We se now that only the high yield bond’s yields came close the Lendix loans. This is what I have expected.
In the following image I have put together the per annum yields (over a 2.5 year period) of the ETFs and Lendix. Logically the high yield bonds and Lendix are in front.
Despite the different initial position I find that the comparison shows us somethings. We see that we would have been better of with Lendix loans then the ETFs (from a yield perspective). As the comparability is not really given I see p2p loans as addition to a multi asset portfolio and not as a replacement of standard bond products. The loans track record is too short and we have no liquidity option here which we have with the ETFs which can be sold nearly instantly. You should always watch out for liquidity if investing. What I will try further in a later article: compare the default probability of Lendix loans with high yield bonds.
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