Time For ETF Share Lending To Come Clean

January 20, 2015

One of the great benefits of the ETF structure is its inherent transparency.

The vast majority of ETF issuers publish their fund's holdings daily, frequently in analyst-friendly .CSV files. Even those that don't do this are required to disclose their creation baskets daily, giving investors and analysts at least a general idea of what the fund contains.

Contrast this with traditional mutual funds, which typically release holdings on a quarterly basis and with a lag time of up to two months. Who wants to hand over their portfolio with only a "trust me" in exchange?

That said, there's one aspect of ETFs that still takes place largely in the dark: securities lending.

Most issuers barely acknowledge their lending programs, at least outside of required regulatory disclosures, which are minimal.

The only exception is Van Eck, the firm behind the Market Vectors line of ETFs. Each fund page on Van Eck's website includes securities-lending data, with a level of detail not seen from any other issuer. Van Eck deserves kudos and, more to the point, other issuers need to step up their game.

Securities lending is one of the more arcane subjects within the ETF sphere. For most funds, the effects of securities lending—both good and bad—are inconsequential, a matter of a few basis points here and there.

Sometimes, though, it matters a lot. In 2013, Dave Nadig pointed out that Guggenheim's Solar ETF (TAN | B-36) was throwing off a 5.6 percent yield from a portfolio of solar energy start-ups, most of which had never earned a profit, let alone paid a dividend. But with everyone and their grandmother trying to borrow and short these small, less-liquid solar stocks, the fund was able to collect some handsome fees through its securities-lending operation.

Clearly, the potential for lending income should at least be on the radar when considering an ETF investment. Unfortunately, assessing a fund's lending operations has never been easy.

On our ETF Analytics platform, we track two securities-lending metrics, both found on the “Efficiency” report tab. The first is whether securities lending is active; and, secondly, how lending profits are split between the fund and the issuer. The profit split is set by issuer policy and rarely changes, and we get it by simply contacting the issuer and asking. Most issuers—BlackRock and WisdomTree being the major exceptions—rebate 100 percent of lending profits to the fund.

Determining whether a fund is actively lending securities is trickier...



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