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Can securities lending benefit an ETF portfolio?

Securities lending is a well-established activity where ETFs make short-term loans of the underlying stocks or bonds in the portfolio; this can incrementally increase the returns for shareholders.

How ETF securities lending works

First, a large financial institution asks to temporarily borrow a stock or bond from an ETF. To borrow the asset, the institution must compensate the fund and provide collateral, which must exceed the value of the loaned stock or bond. The fund company invests the collateral in low-risk money market funds, which can generate incremental returns until the borrowed stock or bonds are returned.

Potential benefits of securities lending

Investors may benefit from securities lending because the fund can generate additional income. Securities lending is a relatively low-risk way to unlock the full value of a portfolio and enables investors to potentially collect higher returns than they would otherwise.

Our approach to securities lending

While not completely risk free, we believe in managing our security lending operations in a way that is in our clients’ best interest and with prudent risk management.

  • Robust assessment of borrowers
    We select highly credit-worthy borrowers based on conservative credit standards defined by our risk team, which operates independently of our securities lending business.
  • Skillful risk management
    We take a conservative, low-risk approach and use our proprietary risk and investment management platform to integrate the capabilities of our dedicated research, trading and risk-management teams.
  • Collateral standards
    Cash is the most common form of collateral. We require borrowers to post excess collateral of at least 102% of the loan value and keep it until they return the stocks or bonds.
  • Proprietary technology
    Our dedicated team works on custom-built reporting, operations and trading systems to help ensure transparency and efficiency.