Auto Loan Losses: Navigating Through the Noise | ETF Trends

By Sage Advisory

Over the last few quarters, there have been numerous news headlines noting the rise in auto loan delinquencies. The headlines tell only part of the story, however, as many of the losses can be attributed to subprime auto loans, which comprise roughly 40% of the auto loan market.

Over the past decade, losses on automobile asset-backed securities (ABS) had actually trended downward and reached historic lows. This is due in part to the strong financial position of the American consumer. A decade of historically low rates combined with very low unemployment helped to keep the consumer in a stable environment and auto loan defaults relatively low. While it is true that delinquencies and losses have increased, this is due primarily to losses in the subprime portion of the auto loan market, which is $55 billion of the $140 billion market. Specifically, delinquencies and losses have increased for subprime issuers who have a poor track record for underwriting and managing risk.

While current losses on prime auto loans are higher than their historical lows (0.56% vs 0.30%), they are still very low and well within expectations.

Prime Default Index

Over the last five years, smaller-scale (non-benchmark) subprime issuers have seen losses increase from 7.60% to 9.90%, a much larger increase that weighs on the sector as a whole.

Non benchmark subprime default index

Despite subprime auto weakness, Sage believes that prime auto borrowers are in a healthy position and do not pose a systemic risk. Given the strong job market, consumer ABS is still a healthy sector with a compelling risk-reward value. The sector is largely AAA-rated, and a great alternative to other high-quality, lower-yielding assets.

This article was written by the team at Sage Advisory, a participant in the ETF Strategist Channel.

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