iShares Scraps 50% Stock Lending Limit

iShares has scrapped its limit on stock lending for all of its physically replicated exchange traded funds (ETFs) in an attempt to boost profits, ETF.com can reveal.

As of 22 June the ETF provider decided to ditch the 50 percent limit of an ETF’s net asset value that could be lent out in a stock lending program, just three years after it was implemented, meaning there is more opportunity for revenue.

“Based on more recent feedback, BlackRock has reviewed the utilisation limit and decided to remove it to ensure clients can benefit from additional securities lending returns in funds where there is more borrowing demand,” said a BlackRock spokesman.

iShares ETFs domiciled in Europe were lent out for an average of less than 10 percent in the year ending 31 March 2015.

No Client Communication

The provider has not announced the move to clients. Adam Laird, passive investment manager at Hargreaves Lansdown, said: “Many ETFs excel at transparency of their lending arrangements, so it is vital that iShares communicate this change with their investors.”

The move is against the tide, as UBS set a 50% lending cap in May 2014, while HSBC Asset Management stopped sec lending in December 2013. However, sec lending is still widely practised amongst many ETF issuers.

The provider will continue to give the majority of revenue from securities lending back to the client, and investors will receive the same so-called “risk parameters” as before, such as “high quality collateral” which is of higher value than the loan – up to 112 percent of the value of the loan. BlackRock also provides an indemnification against borrower default.

Downgrade For investors?

7IM portfolio manager Peter Sleep explained that ETF issuers can lend out their less risky assets like government bonds to banks, which hold them on their balance sheet to satisfy the regulators and, in return, offload more risky equities and other assets back to the ETF provider as collateral.

“What has remained profitable is the collateral upgrade swap – which is not an upgrade, it is a downgrade for investors,” said Sleep. “Look at the iShares $ Treasury Bond 1-3yr UCITS ETF – 46 percent is out on loan on average, and 3.5 percent of the collateral is Baker Hughes, a U.S.-listed oil services company – a bit of an unloved spot at the moment.”

Ben Seager-Scott, director, investment strategy at Tilney Bestinvest, said he tends to avoid ETFs which engage in securities lending.

“I do accept some of the arguments of the providers that it provides further revenue to the funds that reduces the effective cost but from my point of view it adds unnecessary complexity to products that are supposed to be simple and transparent,” he said.