Dear monkeys,
Recently read about a WSO thread about religious ETFs and thought about how absurd they sounded.... That they're actually monetizing the church business (not that this hasn't happened in other forms LOL)
Then, lo and behold, another surprising ETF based on consumer loans! Here's what Bloomberg has to say about it:
BlackRock Inc.’s planned iShares Consumer Asset-Backed Securities ETF will invest in notes supported by consumer loans, such as student debt and credit cards, according to a regulatory filing on Friday. If approved, it will be the first ETF to target the ABS market.
This really seems like a mortgage-backed security... only that now it's not even backed by mortgages! Here's what the facts say:
Signs of trouble are however brewing, with suspicions of fraud in some auto loan applications, a decline in credit-card recovery rates and an increase in late payments on private student loans.“Student-loan debt, car loans and credit-card debt are all huge buzzwords today and some even predict them to be the center of the next crisis,” said Will McGough, a senior vice president and portfolio manager at Stadion Money Management, which owns a mortgage-backed debt ETF.
What do you guys think? What problems can occur due to this? I'm already thinking of several things like pricing issues.
Pricing is definitely going to be a big issue here; it depends on the cr/rd mechanism outlined in prospectus and how it allows for arbs to come in and get the job done. I can imagine they'll probably allow redeemable underlying securities to be chosen from a basket, creating a CTD type of scenario (this tends to be the case with already existing FI ETFs, rates and credit). That being said, the liquidity and pricing efficiency of the ETF will be a function of that of the underlying...how easy is it to trade in the underlying market? No idea, but intuitively probably not so much.
Other issues such as actual trading of this security is a function of the problem above; it most likely won't happen. THAT BEING SAID, lets look at HYG/JNK. HY Credit ETFs were launched and nobody cared about them...now folks such as Jane St, RBC Prop, etc love these products for juicy arbs and market makers at BB love it because they capture all clients from macro hf, credit accounts and even real money guys. Hell, HYG/JNK/etc are talked about as a no brainer when it comes to hedging a credit portfolio in comparison to CDX, which does very little until shit hits the ceiling. If ABS becomes as topical as HY credit was (like during commodity sell off a few years back, tons of trade structures utilizing HY credit ETFs, energy equity, etc), it could perhaps see the same success story. That's a thematic call.
Just a nitpicky note, ETFs are like MBS insofar as they are pools of other underlying assets. Outside of that, not so much.
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