What is the 'Lehman Brothers Asset-Backed Securities Index'

Lehman Brothers Asset-Backed Securities is the former name for a fixed-income index focusing on asset-backed securities (ABS). These include bullet-structured, controlled-amortization and pass-through securities, which have a minimum average life of one year. The index, which is currently maintained by Bloomberg L.P., serves as the performance benchmark for many funds of asset-backed securities.

BREAKING DOWN 'Lehman Brothers Asset-Backed Securities Index'

The Lehman Brothers Asset-Backed Securities Index was a subset of the Lehman Brothers Aggregate Bond Index. It's now known as the Bloomberg Barclays U.S. Aggregate Bond Index, a primary benchmark for bond funds. The Lehman index, first created in 1973, changed names after Lehman Brothers declared bankruptcy in 2008, caused by its exposure to the subprime mortgage crisis.

The ABS index specifically focuses on three types of asset-backed debt: auto loans, credit cards and home equity loans. All securities in this index are from senior classes of an issue.

How an Asset-Backed Securities Index Works

Asset-backed securities differ widely depending on the assets on which they are based and can be complicated and potentially risky investments. An ABS Index can offer a relatively simplified way to access and track securities which can be quite cumbersome and fluctuate in their structure and valuation. The purpose of these investments is to create securities which can generate cash by collecting specific types of illiquid assets based on common characteristics and risk profiles. But as seen during the subprime mortgage crisis, they can carry significant volatility.

Asset-backed securities fall into three tranches

  1. The class A tranche is sometimes called the senior tranche and is it's the most significant slice, with higher-rated products. 
  2. The composition of class B tranche is of asset-backed securities (ABS) with lower credit quality but higher yield
  3. The class C tranche may not even be salable to investors but could help offset losses

The three tranches tracked by the former Lehman Brothers index, home equity loan asset-backed securities (ABS), auto loan ABS and credit card ABS, have similarities and differences. 

Home equity asset-backed securities focus on home equity loans which have some similarities with the mortgages, giving close attention to the credit ratings of the borrowers whose loans are backing the security.

An auto loan ABS is entirely different, given car loans' particular kinds of amortization, cash flow, size and chance of being refinanced. And credit card receivable ABS, a non-amortizing asset-backed kind of security, can be marked by volatility, given, among other things, the variance with which borrowers may pay down their balance or allow their credit card debt to increase.

An asset-backed security index offers a tool through which investors can track and trend their portfolios of sophisticated instruments such as these, providing a relatively simple method to monitor price and performance.

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