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Securities lending by exchange-traded funds has nearly doubled since 2017, according to data from EquiLend, reflecting the huge growth in assets under management across the ETF industry.
The value of ETF loan balances – the value of securities on loan at any time – increased by 77%, from an average of $ 37.5 billion in 2017 to $ 66 billion between Jan. 1 and mid-May, according to EquiLend, a securities lending platform. This overshadowed an overall 21 percent increase in the broader securities lending market.
“As the ETF market has grown, their securities lending may have increased,” said Nancy Allen, global manager of DataLend, EquiLend’s market data division.
According to data from ETFGI, a London-based consultancy firm, ETFs assets under management jumped 85%, from $ 4.7 billion at the end of 2017 to $ 8.7 billion at the end of April.
Securities held by ETFs remain a small proportion of the total loan market, at 2.57% in 2021 compared to 1.75% in 2017, but the growth is a reminder that investors need to be aware of some pros and cons.
Securities lending is popular with some owners of securities, including ETFs, because it allows them to generate income from securities that they do not intend to sell. Borrowers are usually banks and this practice is welcomed by many market participants as it increases liquidity.
However, securities lending has drawn criticism as borrowers include short sellers, who are sometimes referred to as predators. This practice also introduces stewardship issues, as the ability of shareholders to influence the companies they own is reduced if the shares they own are loaned out. Finally, the practice introduces a counterparty risk in the event of default by the borrower and the value of the collateral received in return becomes less than the value of the securities loaned.
Despite these ethical and financial clouds, securities lending can bring benefits to some ETF investors because, as Rumi Mahmood, senior partner for ESG research at MSCI has pointed out, the resulting income can significantly offset the losses. fund charges.
The potential savings cannot be calculated without reviewing the fund datasheets in detail, as the total expense ratio (TER) or ongoing expense figure (OCF) of a fund, which includes management and operating fees. other known ongoing charges, does not reflect the impact of securities lending income.
The potential payouts also vary as some titles are more sought after than others and a higher fee may be charged to lend them, Mahmood said. These currently include small caps, emerging market equities and Canadian equities, he said.
The table below shows how it can work.
BlackRock, owner of iShares and the world’s largest asset manager, said it earned an average of $ 165 million per quarter from securities lending in 2020, although this represents less than 5% of its total revenue.
He declined to reveal what percentage of that income came from ETFs.
In Europe, he said iShares ETF shareholders received 62.5% of income from securities lending. An online policy document shows that this percentage typically reaches between 77% and 82% for funds domiciled in the United States.
Some other vendors return even higher revenue percentages.
European investor rights group Better Finance said it had examined 18 Vanguard ETFs that had entered into securities lending agreements as of June 2020, the latest data it had. He found that the funds received an average of 92 percent of the practice’s income.
“We encourage investors to compare the net [ie after fee] the returns that a product gets from securities lending rather than just comparing the fee percentages shared by the vendors, ”BlackRock said.
BlackRock’s European Securities Lending Policy Document reveals that for iShares ETFs domiciled in Europe, 11% of their total net asset value was loaned in 2020.
In contrast, Vanguard said that historically, on average, the percentage of securities in Vanguard funds that are loaned out has been 2%.
“We strongly advocate a conservative approach to securities lending. We see a highly measured and risk averse approach to securities lending as a means of generating additional income for the funds, and therefore the investors in those funds, and not as an income generating machine for the asset manager, ” Vanguard said.
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