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Demystifying a Credit Crisis Bogeyman

Everything you need to know about SIVs.

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Among the various acronyms in the financial services world, the structured investment vehicle, or SIV, now has an evil ring to it because of its association with the credit crisis. And though SIVs do pose some real risks, we think investors should understand what those are (and aren't) and how to evaluate all the media hype surrounding them. In this article, we will explain SIVs in plain English. We will talk about how SIVs have affected the markets and what effects they might have in the future. And then we will discuss two stock picks for investors who want to take advantage of all the negative publicity around SIVs. (Click here to see all the articles in our credit crisis series.)

SIVs Explained
The term "structured investment vehicle" is a rather generic term for a fund that borrows money to invest in a portfolio of securities. The SIV borrows money from investors for a short time (borrowing short) and pays a fairly standard short-term borrowing rate (close to LIBOR, the rate at which banks lend to each other). It then invests that money in securities that pay higher interest rates. Usually the SIV makes a spread of 0.25% between its cost of borrowing and what it earns on its investments. With a big enough fund--most are well more than $1 billion--that small spread can translate into a big chunk of change.

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Rachel Barnard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.