How do returns and volatility in marketplace lending compare to the stock market?

Many believe equities to be king when it comes to annualized returns. Investors commonly use an estimated 7% annual return for stock holdings. However, this expectation is optimistic. Credit Suisse reports that the inflation-adjusted annualized return of stocks is just 5.4% over a period of 1900-2011. Bonds, over the same time frame, only deliver 1.7%. Housing offers even less at 1.3%.

It’s no wonder investors today are looking for other avenues to build wealth. For many, marketplace lending is serving the goal of higher returns amid reasonable risk. In this post we look at why the industry is primed for growth and how marketplace lending returns and volatility compare to the stock market.

The start of an industry

During the upheaval of the global financial crisis individuals needed loans. Increasingly risk-averse banks were turning away from borrowers. This is when marketplace lending, built from technology, came to the fore. In contrast, banks are an invention from an analog era. The digital advantage means customers receive loans faster within a low-cost model. The industry continues to grow.

As recently as 2014 marketplace lending issued over $23.7 billion in loans. Despite these towering numbers “the market-penetration achieved by MPLs is to date still well below one per cent,” according to Deloitte. This creates enormous opportunity for the future of a new industry. As the industry matures its legitimacy grows. More investors are embracing this innovation. As a logical next step, these investors are looking to analytics to understand the returns.

Measuring marketplace lending returns

To understand expected returns from P2P lending investors can use the US Consumer Marketplace lending Index from Orchard. This database includes a collection of marketplace lenders who have originated and funded a minimum of $250 million of US consumer loans.

The index is a powerful tool for cutting through the marketing language and understanding real returns. Though the data is limited to US marketplace lenders the index provides a general baseline for expectations. The list below, from Orchard, provides an overview of how 983,685 P2P loans have performed in Yield-To-Date as of February 21, 2017.

2016 3.95%
2015 6.93%
2014 8.71%
2013 7.83%
2012 6.96%
2011 6.70%

Marketplace lending is often grouped in the category of “Alternative Investments.” The below chart provides an overview of how some alternative investments have performed between 2001 and 2015. Many of the Yield-To-Maturity rates in the above list from Orchard fall in line with the general performance across sectors like commodities, managed futures, and global macro strategies.

markeplace-lending-returns-volatility

Source: Informa Investment Solutions & BlackRock

However, the value is not just in the return. As the right side of the above chart illustrates, risk (volatility) is a consideration for investors. The volatility rate of 16.28 for a portfolio consisting entirely of stocks is relatively high compared to a spread of stocks, bonds and marketplace lending investments. Research indicates that a diversified group of holdings with as much as 16% devoted to marketplace lending can have volatility less than 2% or even as low as 0.9%. Interestingly, this same research shows that as one reduces the marketplace portion of this portfolio, and increases the equity and REIT holdings the volatility increases.

optimum-portfolios-asset-allocation

Source: “How much should you invest in Marketplace Lending?“, LendingRobot Research

Moreover, the volatility of a stock/bond portfolio with no marketplace lending is approximately 40% according to the same research. That is, if you were to invest across all the above funds while excluding marketplace lending you would in fact expose yourself to more risk.

Even if we shift focus to the European stock market volatility is relatively high compared to the 1-2% that comes with including marketplace lending in a portfolio. The 5-year annualized return in the Euro Stoxx 50 is 9.9% with a volatility over the same period of 19.7.

Since inception Bondora has generated an annualized net return on investments of 15.3%. Therefore, investors who choose to our marketplace lending platform can further diversify their portfolio while reaching for a stronger return.

The returns in marketplace lending are worth consideration given a widespread expectation of lower equity returns in the future. “Market returns on stocks and bonds over the next decade are expected to fall short of historical averages,” according to Charles Schwab. This expectation comes amid low inflation, low interest rates and tepid growth in price-to-earnings ratios.

The investing landscape is changing. Investors have more options than ever before. Bolstering returns means bolstering the variety of instruments while managing risk wisely. Remember, investor returns can be volatile and there are no guarantees. For those interested in getting started visit our General Statistics page for an overview of total performance on Bondora.