Everyone can’t own the good loans: why indexing P2P lending is different than indexing stocks

Indexing P2P loans is different than indexing stocks, because with stocks, everyone gets a chance to own a piece of the good stocks. In P2P loans, not everyone can own the same loans, and the highest yielding loans often get funded first by active investors.

If you “index” with a P2P index fund that invests in all loans on the platform, active managers will quickly fund the higher yielding loans you will be left with lower yielding loans (AA and A grade loans) which only yield 5.18% and 6.45%, thus slightly under-performing the asset class. This problem will grow as more active managers invest on P2P platforms.

A large part of the 10% average return on Prosper is driven by the high yielding loans, and many of those are getting snapped up through the API and AQI by actively managed lenders the minute they appear on the platform (large investors sometime fund over 90% of the loan when they appear on the platform).

A better strategy is to wait for higher yield loans, pick the best loans, and diversify slowly but in higher yielding loans rather than investing in all loan grade as a tool for getting better returns.