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Loan Participation ETFs
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About Loan Participation ETFs |
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Loan Participation ETFs Overview and forecast
The Loan Participation ETFs operate in a broader area of debt security, across all loans, including the more rarified version Senior Loans sector, loans which are entitled to payment before other creditors. This is one of the more advanced financial areas, but it\'s also one of the toughest, and Loan Participation ETFs have been trying to make up ground since the whole concept of debt securities blew up during the 2008 crash.
As a class, the Loan Participation ETFs have started making some headway after that disastrous period, although many of them have yet to make it back up to their pre crash price ranges. Most of them followed the market, and bottomed in January 2009, rose in February, and bottomed again March 2009, with a return bounce after March, to levels above the February ranges.
It seems to be typical of the financial sector ETFs in particular that they become much better traders in their post crash price ranges, and the Loan Participation ETFs have been producing quite good margins in their own new low price range. Volumes tend to be in the tens or hundreds of thousands, rather than millions, and a quick look at any of the Loan Participation ETFs on our chart http://www.etftips.com/Loan-Participation will show that if the investors have had some grounds for doubt, traders haven\'t had to work too hard to find value.
Debt securities have understandably, but largely incorrectly, been perceived as being the same thing as the mortgage securities which destroyed so much equity and so many institutions. Debt is a risk factor in any form of finance, and trading in debt incurs risks by nature. It\'s the quality of the debt that matters. Loan Participation ETFs, by nature, gravitate to higher quality debt like Senior Loans, but also participate in the unsecured markets, which can be more lucrative, and attract higher rates of interest, making them good salable commodities under normal circumstances.
Short term (6 months)
The return of relatively healthy trading in the equity markets has also revived this market, and the Loan Participation ETFs have done some good things for the people who bought in to their bottom price ranges in March 2009. That\'s about as far as the proven performance goes, in their new incarnation as traders, but they are showing signs of good regular trading values over monthly periods.
They\'re not particularly fast movers, but it\'s a matter of opinion whether anyone wants to see anything in the loans market spiking like they did in the crash, ever again. There are basically two views of the performance of the Loan Participation ETFs: (1) The spruiker\'s view, which is that they were undervalued, and are now adjusting to a more correct value, and (2) The skeptic\'s view, which is that they\'re now trading better because a lot of the negative heat has gone out of the debt market, and underlying values on good loans are attracting investors. Some of these ETFs are also holding good quality loans, and quite technical spreads, so the risk factor is well covered, hence the interest.
Either way, Loan Participation ETFs can be seen as having good short term potentials. The combination of assets, trade, and visible upside to loan values are pretty legitimate reasons for investor interest.
Medium term (2 years)
The medium term for anything carrying an interest rate with it as a valuation isn\'t likely to be that easy to judge. From historic lows, interest rates don\'t have anywhere but up to go. The question is when that will happen. Given the sickly, anemic state of the credit industry, and the fact that loans generally, if not an endangered species, are likely to be thin on the ground, the Loan Participation ETFs might well become the only retail show in town for investment in this sector.
They could also benefit, dramatically, if the value of their own loans portfolios is boosted by a return to normal commercial rates of interest. This is likely to be a phased process, but interest rates can move rapidly, and loan portfolios can move faster, with premiums and trading values tending to get ahead of rates. The Loan Participation ETFs could be looking very good, in the medium term, although realistically the expectation would have to be that this move would be at the far end of the medium term, after market liquidity has returned to higher levels.
Long term (5 years)
The Loan Participation ETFs contain a lot of regular ETF fund managers, and many have been through one cycle of boom and bust, in their existences. The 2008 crash marked the beginning of the tough times for their industry and debt securities generally. It must be stressed at this point that before they became market lepers, debt securities were very highly rated by the markets. They were the smart moves. Hedge funds were highly active in the debt and mortgage securities fields.
It would be neither fair nor accurate to consider the crash as much more than a large glitch in terms of investment in debt securities. It\'s very likely that after the dust from 2008 settles, the debt securities industry will return bigger than ever, just perhaps a lot wiser. Loan Participation ETFs are well placed to ride the next big tide when that happens, and a five year period should see some definite moves in that direction.
Qualifiers to projections
The obvious downside to the Loan Participation ETFs is a slow market, where not much happens over long periods of time in an essentially stagnant loans sector. The upside, however, could be very important to the whole class of ETFs. The effect of the crash on debt securities is likely to be multiple. Regulation is more than probable, but the most ironic consequence of the crash could well be that it has highlighted the volumes of money which debt securities can create, and the income levels which that debt can generate. The crash is a hiatus, and much bigger markets can be expected to develop in any recovery, as the big global economies restart.
The sector as a whole can therefore be expected to be under the microscope as financial institutions go looking for positions in this potentially highly profitable emerging market. Regulation would also be seen as providing more security fro both funds and investors. The Loan Participation ETFs may well be in the right place at the right time to attract major buyers, on these criteria.
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Last Updated on: 2010-01-14 02:03:40 |
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