Megaphone icon ETF Database is now VettaFi. Read More >
ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Future ETFs
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Modern Alpha
    • Multi-Asset
    • Portfolio Strategies
    • Retirement Income
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Videos & Podcasts
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. ETF Investing
  2. Understanding Securities Lending in ETFs
ETF Investing
Share

Understanding Securities Lending in ETFs

Sam BourgiDec 30, 2017
2017-12-30

In the world of exchange-traded funds (ETFs), securities lending is a simple process that can generate significantly higher returns for investors. Of course, the ‘lending’ aspect of any investment portfolio generates significantly higher risk than otherwise would be the case.

The growth of ETFs has reached epic proportions, as more investors flood the market on the hope of earning income that is above and beyond conventional equity markets. This has led more investors to pursue ETFs that practice securities lending.

The logic is fairly straightforward: an equity-based ETF will typically contain thousands of shares of various stocks. If there is a short-seller who is willing to borrow these stocks and is willing to post collateral for doing so, it makes sense to lend them out for higher returns. This strategy has been employed successfully in the past and remains a go-to method for investors seeking tighter index tracking and more lucrative returns.

That being said, ETF securities lending has its fair share of controversy, mostly emanating from the debate over ‘inside’ and ‘outside’ lending. Inside lending refers to the lending of underlying securities whereby ETF issuers dole out the fund’s underlying assets for the benefit of all investors. Outside lending is the lending of ETF units through a lending agent.

Securities lending is also far riskier than conventional buy and hold investment strategies. One of the biggest risk in securities lending stems from the short-seller – namely, if they go bankrupt. Fortunately, standard practice prevents borrowers from taking more than they are worth. One way to avoid a potentially bankrupt borrower is to force them to provide collateral that exceeds the value of the loaned securities. This is exactly what securities lending guidelines do.

The real risk stems from what the issuer does with the collateral they receive. Will they sit on it or put it back into the market for extra interest payments? This is where securities lending practices go sour, as we saw with Lehman Brothers during the 2009 financial crisis.

But Is It Profitable?

As is the case with any investing strategy, success depends on several factors. Securities lending programs have proven successful in the past, especially among ETFs that hold in-demand securities. These funds can earn a significantly higher premium lending out their holdings. It isn’t terribly uncommon for some securities lending ETFs to pay yields as high as 7% even though none of their underlying holdings pay dividends. This means the ETF is generating enough revenue from securities lending to pay a handsome dividend.

Funds such as the Vanguard Small-Cap ETF (VB A), iShares Russell 2000 ETF (IWM A-) and the iShares Core S&P 500 ETF (IVV A) have been known to generate sufficient income through securities lending.


Content continues below advertisement

The Bottom Line

Securities lending is an attractive option for funds holding high-quality, in-demand stocks. However, executing the strategy profitably takes a little more finessing. That being said, there are at least a few funds doing it right. Investors seeking greater returns at a slightly higher risk might find it useful to focus on these funds.

» Popular Pages

  • Tickers
  • Articles

Aug 16

A Diversification Strategy to EV Investing

Aug 16

What Europe’s Energy Crisis Means for Carbon Markets

Aug 16

Headlines Could Use a Warning Label!

Aug 16

ETF Prime: Lara Crigger on Clean Energy and ESG

Aug 16

Morgan Stanley ETFs Are Arriving

Aug 16

A Fireside Chat With EPD: Managed for Long-Term Success

Aug 16

Check Out RHS for Walmart Exposure

Aug 16

New ConvexityShares ETFs Offer Exposure to SPIKES

Aug 16

Demand for High Yield Bond Funds Went Up During July

Aug 16

OpenAI’s DALL·E 2 Model Has Profound Implications

QQQ

Invesco QQQ Trust

VOO

Vanguard S&P 500 ETF

SPY

SPDR S&P 500 ETF Trust

VTI

Vanguard Total Stock Market...

SCHD

Schwab US Dividend Equity ETF...

VNQ

Vanguard Real Estate ETF

ICLN

iShares Global Clean Energy...

XLK

Technology Select Sector SPDR...

ARKK

ARK Innovation ETF

VYM

Vanguard High Dividend Yield...

Loading Articles...
Help & Info
  • Contact Us
  • Mission Statement
  • Press
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © ETF Flows LLC
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X