How does P2P stack up against other investments?
PEER-TO-PEER platforms have had a stellar year, with the P2PFA members’ cumulative lending now exceeding £8bn. The rise of the Innovative Finance ISA has brought P2P investing into the mainstream, and many platforms have seen a surge in demand as retail investors rush to take advantage of their inflation-busting returns.
But as P2P enjoys its moment in the sun, it is worth looking at how the sector stacks up against investment and savings products.
- P2P vs Exchange Traded Funds (ETFs)
ETFs track the performance of a variety of different stock markets and market segments, mimicking their performance by investing in a selection of the most popular shares. Over the past year, the FTSE 100 has broken a number of records, ending last month 12.43 per cent higher than 30 June 2016. This has been good news for ETFs which track the London Stock Exchange. The iShares Core FTSE 100 UCITS ETF returned approximately 16.92 per cent between 30 June 2016 and 30 June 2017 by tracking the performance of the UK’s top 100 companies, while the Lyxor FTSE 100 UCITS ETF C-GBP and the db x trackers FTSE 100 UCITS ETF (DR) returned a competitive 16.81 per cent and 16.80 per cent, respectively, over the same time frame.
While the majority of P2P platforms have not been able to beat the unusually strong performance of the FTSE 100, a few have come very close. LandlordInvest and Lendy are both offering up to 12 per cent on a variety of property loans, and Ablrate has listed asset-backed loans on its site for 14 per cent.
Like ETFs, most P2P investments can now be packed up in a tax-free ISA wrapper, allowing investors to maximise their returns and grow their capital though compound investing. However, it could be argued that P2P investments have the advantage of being less volatile than the markets. This past year’s stellar stock market performance owes a lot to the post-Brexit currency crash. Ongoing political uncertainty means that it is difficult to predict how the stock market will look in one month’s time, let alone one year. P2P loans, on the other hand, are generally locked in for a fixed term period of one to five years.
- P2P vs cash ISAs
A lot has been written about the dire state of the cash ISA in the low-interest rate environment. Banks use the Bank of England’s base rate as a guide for their own interest rates, and the base rate has been languishing at an all-time low of 0.25 per cent since August 2016. Before that, it had remained static at 0.50 per cent since 2009.
As a result, the returns offered by cash ISAs have reached historic lows. By December 2016, there was not a single cash ISA offering more than one per cent, and by May 2017, P2P platforms were noticing a surge of ISA transfers which they credited in part to low-paying cash ISAs.
Once seen as a safe haven investment, cash ISAs now guarantee a loss to savers. According to Moneyfacts data, by June 2017, the top-performing cash ISA was a fixed rate two-year bond being offered by the Bank of Cyprus UK at just 1.32 per cent. This compares with an inflation rate of 2.6 per cent, meaning that savers would actually lose 1.3 per cent in real money terms, even in the top-performing cash ISA on the market. The lowest cash ISA rate is being offered by NatWest, at 0.01 per cent.
It is not surprising that P2P platforms have been able to use these sub-par rates to their advantage. Every single P2P platform is offering inflation-busting returns, and most are offering much higher rates. Funding Circle is offering a maximum return of 7.2 per cent on its SME loans, while Zopa is offering 6.1 per cent to Zopa Plus account holders, and RateSetter is offering five-year loans at a fixed rate of 4.6 per cent.
These are the figures that suggest that P2P investing has emerged as a viable alternative to the traditional investment channels. If platforms can maintain their low default rates and steady returns, the future will be bright.