Structured Credit & Securitized Yield
Credit risk packaged into tradable instruments — from ABS and MBS to CLOs and consumer loan funds.
Overview
Structured credit and securitized yield encompasses credit risk packaged into tradable instruments including ABS (asset-backed securities), MBS (mortgage-backed securities), CLOs (collateralized loan obligations), and consumer loan funds. Market size: $12T+ US securitized debt market (2024). Investment access via: (1) Consumer loan funds (LendingClub, Prosper notes), (2) ABS ETFs and funds, (3) CLO equity and debt tranches (institutional), (4) MBS funds and ETFs. Returns: Consumer loan funds 4-8% net yields; CLO equity 12-18% IRR; ABS 4-6% yields. Key advantages: Higher yields than treasuries, diversification across thousands of loans, senior tranches offer credit enhancement. Risks: Credit cycles (2008 MBS crisis), prepayment risk, and complexity. Suitable for sophisticated fixed-income investors seeking yield enhancement with controlled credit exposure.
Key Benefits
- Yield enhancement: ABS/MBS offer 100-300bps over treasuries; CLO equity 12-18% vs. 5% high-yield bonds
- Diversification: Portfolios backed by thousands of loans (auto, credit cards, mortgages); reduces single-borrower risk
- Credit enhancement: Senior tranches protected by subordination (equity/junior debt absorbs first losses); AAA ratings achievable
- Floating rate structures: Most CLOs and ABS float with SOFR; interest rate hedge (rates rise = coupons rise)
- Prepayment income: When loans prepay, reinvest at higher rates (if rising rate environment); positive convexity
- Analytical transparency: Detailed loan-level data available (LTV, FICO scores, geographic distribution); model credit risk
- Liquidity: MBS and ABS trade daily (though spreads widen in stress); more liquid than direct loan portfolios
Platform Reviews
In-depth analysis using our three-pillar evaluation framework
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Accessing Structured Credit
Start with Consumer Loan Platforms
LendingClub and Prosper (now institutional-only) pioneered retail access to consumer loans. Current options: Yieldstreet consumer loan funds (minimum $10K), Percent consumer credit (minimum $500). Returns: 5-8% net yields. Diversification across 100-1,000 loans. Default risk: 3-7% annually. Good entry point to securitized credit.
Explore ABS via ETFs
iShares Short-Term ABS ETF (IBMS) provides diversified ABS exposure (auto loans, credit cards, student loans). Expense ratio 0.25%. Yield 4-6%. Duration 1-2 years (low interest rate risk). Alternative to treasuries for enhanced yield with minimal added risk. Good for conservative investors.
Consider MBS Funds for Mortgages
PIMCO Mortgage Opportunities Fund (PMO) actively manages MBS portfolio. Yield 8-10%. Leverage used; higher risk than ABS. Residential and commercial mortgages. Professional management handles prepayment risk, credit analysis. Suitable for income-focused investors comfortable with mortgage credit.
Understand CLO Structures (Advanced)
CLOs (collateralized loan obligations) package corporate loans into tranches. CLO debt (senior): 6-8% yields, AAA/AA rated. CLO equity (junior): 12-18% IRR but first-loss position. Institutional minimums ($250K-$1M). Extremely complex; requires credit expertise. For sophisticated investors only.
Structured Credit Risks
Important considerations before investing in structured credit & securitized yield
- Credit cycle: Consumer credit defaults surge in recessions (2008: 15-20%; 2020: 8-12%); MBS/ABS losses spike
- Complexity: Structured products difficult to analyze; waterfall structures, prepayment models, credit enhancement math opaque
- Prepayment risk: When rates fall, loans prepay; reinvest at lower rates (negative convexity); MBS especially affected
- Model risk: Credit models underestimate default correlations; 2008 MBS crisis example (models assumed no nationwide housing decline)
- Leverage risk: CLO equity and mortgage REITs use 3-10x leverage; amplifies losses in downturns
- Liquidity: ABS/MBS spreads widen 200-500bps in stress (March 2020); forced sellers face significant losses
- Regulatory changes: Dodd-Frank risk retention rules, Basel III capital requirements affect CLO/ABS structures
- Tranche subordination: Junior tranches absorb losses first; CLO equity can lose 100% in severe downturns despite senior tranche protection
Due Diligence Checklist
- Understand tranche structure: Senior tranches (AAA) protected by 30-40% subordination; equity tranches first-loss position; assess risk/return tradeoff
- Check underlying collateral: Auto ABS safer than subprime credit cards; prime mortgages safer than non-QM loans; collateral quality drives returns
- Analyze historical default rates: Consumer loans 3-7% defaults; auto loans 1-3%; credit cards 4-8%. Model expected losses vs. yields
- Assess prepayment models: MBS sensitive to rate changes; use option-adjusted spread (OAS) analysis; avoid negative convexity exposures
- Review manager track record: For CLO equity and MBS funds, manager skill critical; check performance in 2008, 2020
- Verify credit enhancement: What % subordination protects senior tranches? 30%+ = strong; <20% = weak
- Understand leverage: CLO equity, mortgage REITs use 3-10x leverage; amplifies both gains and losses; check debt-to-equity ratios
- Compare to alternatives: Are ABS yields sufficient vs. high-yield bonds? Often ABS offer 100-200bps premium for better credit quality
Real-World Examples
IBMS ETF (2020-2024): $10K invested grew to $11K (2% CAGR). Underperformed treasuries (3%) due to tight spreads but lower volatility. Good cash alternative.
PIMCO Mortgage Fund (2008 crisis): Lost 50% (MBS crash) but recovered fully by 2012. Illustrates MBS volatility but also resilience with professional management.
CLO equity returns (2010-2020): Top quartile CLO equity generated 15-18% IRR. Bottom quartile: 8-10% IRR. Median: 12-13% IRR. Significant manager selection importance.
LendingClub consumer loans (2015-2020): $10K diversified across 200 loans. Default rate: 5%. Net return after defaults: 5.5% annually. Beat bonds, lagged stocks.
Subprime auto ABS (2023): Springboard auto ABS yielded 8% (subprime borrowers). Defaults rose to 10% (2024 recession fears). Investors faced losses despite high yields. Illustrates credit risk.
Explore Subcategories
Consumer & Marketplace Loan Funds
Funds that buy portfolios of consumer, SME, and marketplace loans for yield.
Asset-Backed Securities (ABS)
ABS backed by auto loans, credit cards, student loans, and other collateral.
Mortgage Credit & MBS Strategies
Non-agency MBS, credit risk transfer, and mortgage credit funds.
CLOs & Credit Tranches
Collateralized loan obligations, tranching, and how investors access CLO equity and debt.