Is Securities Lending Good For ETF Investors?

February 26, 2018

How Much Do ETF Investors Benefit?

What benefit from securities lending exists for the end investor directly depends on how much of the associated revenue makes it back into the fund.

Most ETF issuers return to the fund 100% of the money made through their securities lending programs. Others retain some portion of those funds for the issuer.

Vanguard, for example, serves as its own lending agent, charging itself fees amounting to about 5% of gross securities lending revenue. The remainder is returned to the funds.

State Street, however, returns 85% of generated securities lending revenue to the SPDR funds, reserving the rest for State Street affiliates. (One notable exception is the SPDR S&P 500 ETF Trust (SPY), which, as a unit investment trust, cannot engage in securities lending.)

However, BlackRock reserves 25-28.5% of the securities lending revenue made on U.S. equities for the BlackRock affiliate it uses to handle the securities lending, BlackRock Institutional Trust Company (BTC). For other securities types, the portion is 15-20%.

BTC also charges iShares ETFs up to 0.04% of the on-loan amount in additional fees and expenses to handle the management of the collateral. That collateral is invested in money market funds managed by BlackRock Fund Advisors, an affiliate that also serves as the investment advisor to the iShares ETFs.

Potential Conflict Of Interest

Though ETF issuers often claim securities lending is a boon for investors, the reality is slightly more complex. Securities lending does boost ETF returns, but it’s a rare ETF where this additional revenue will be large enough to be noticed by most investors.

But securities lending activity can be meaningful to the bottom line of the issuer, at least for those that lean on affiliates for lending and collateral investment.

Whether this generally leads to a conflict of interest is difficult to say. In general, a well-run securities lending program benefits investors, even if the benefit is slight, and the extra revenue incentivizes issuers to maximize the opportunities on behalf of investors.

There’s no guarantee a given affiliate in charge of securities lending or managing collateral is the absolute best possible choice from an investor perspective. Ultimately, ETF investors simply have to trust the fund’s board is monitoring and evaluating these relationships for their benefit, not the issuer's.

[Editor's Note: Investors can learn whether a given fund lends its securities by checking its Fund Report, under the "Efficiency" tab. The "Securities Lending Active?" field on the right sidebar will display "Yes" if the fund is currently engaged in lending out securities. Investors can also find out how much revenue is returned to the ETF versus the issuer in the "Securities Lending Split (Fund/Issuer)" field.]

Contact Lara Crigger at [email protected]

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