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With Asset-Backed Debt ETF, the Bet Is Can You Pay What You Owe

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(Bloomberg) -- Worried about paying off your university education, new car or shopping habit? ETF investors soon could be betting on that too.

BlackRock’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.

BlackRock spokesman Paul Young declined to comment because the firm’s still seeking approval for the fund.

Consumer debt has ballooned in recent years as Americans ramp up borrowing and capitalize on historically low interest rates. Household debt topped $12.7 trillion in the first quarter, up 1.2% from the end of 2016. 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. "Like all ETFs, we will research, monitor, and potentially use tactically, but for our strategic positioning this ETF represents too small of a niche."


BlackRock already runs funds focused on debt backed by residential and commercial mortgages. The iShares MBS ETF (MBB) has $10.6 billion under management while the iShares CMBS ETF (CMBS) oversees $240 million, data compiled by Bloomberg show.

The new fund plans to track an index comprising investment-grade portions of asset-backed debt, according to the documents. To qualify, tranches must be dollar-denominated and $25 million or more if the notes are first in line to be paid, according to the filing. Securities further down the capital structure must be $1 million or more to qualify, the documents show.

"The ETF wrapper enables issuers like iShares to provide liquid exposure to a range of assets, and enables buyers and sellers to agree on how to price them," said Todd Rosenbluth, director of ETF and mutual funds at CFRA Research, an independent research provider. "But the novelty of this product could require increased education so investors understand the risks and rewards."

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