ETF základy
Securities Lending in ETFs: Return and Hidden Risk
Key takeaways
- Securities lending is the practice by which an ETF temporarily lends its assets (stocks or bonds) to third parties in exchange for a fee and collateral.
- Income from securities lending reduces the effective cost of the fund — for large funds such as iShares, lending can contribute 0.01–0.10% per year to returns.
- The main risk is borrower default combined with collateral value falling below the value of the lent assets — UCITS rules minimize this risk by requiring collateral of at least 102–105% of value.
- The key question: what share of lending income goes to the fund (investors) versus to the manager? Transparent managers publish the split — iShares, for example, returns 62.5% to the fund and keeps 37.5% for the manager.
- If you want to exclude securities lending, look for funds with a "no securities lending" policy — Vanguard UCITS returns 100% of lending income to the fund.
Securities lending is the practice by which an ETF lends part of its portfolio to short sellers or other institutions in exchange for a fee and collateral — and part of this income is returned to investors in the form of lower effective fund costs.
How securities lending works, step by step
The fund (lender) agrees to temporarily transfer a security to a borrower (typically a bank, hedge fund, or institution). The borrower posts collateral — a collateral portfolio generally worth 102–105% of the lent assets. During the loan period, the borrower pays the fund a fee. The fund returns the securities once the borrower closes the position.
How much lending earns and for whom
The return depends on demand for specific securities for short selling. For large, less-shorted funds (S&P 500 ETFs) the lending return is typically 0.01–0.05% per year. For smaller or niche funds (small caps, emerging markets) it can reach 0.3–0.5%.
What matters is how the return is split:
- iShares (BlackRock): 62.5% of income goes to the fund (investors), 37.5% to the manager.
- Vanguard UCITS: 100% of income goes to the fund — but Vanguard otherwise compensates costs internally.
- Xtrackers (DWS): split varies by fund, published in the prospectus.
Risks and how they are managed
The main risk: the borrower defaults and the collateral falls below the value of the lent assets. UCITS regulation addresses this:
- Collateral of at least 102–105% of the value of lent assets.
- Collateral must be highly liquid (government bonds, large-cap equities).
- The fund cannot lend 100% of its portfolio — the limit is typically 50% of assets.
Historically, no large UCITS fund has recorded a case where securities lending caused investor losses. However, the risk is not zero — especially for funds with more aggressive programs. More on UCITS protection in the article What is UCITS. The topic of ETF fund management is examined in more detail in the ETF section.
FAQ
Why does an ETF lend its shares?
To earn additional return for investors. Funds lend shares to short sellers or institutions in exchange for a fee and collateral. The income reduces the effective cost of the fund — in practice compensating part of the TER.
Is securities lending safe?
UCITS rules require collateral of at least 102–105% of the value of lent assets in highly liquid instruments. Historically, no large UCITS ETF has recorded investor losses due to lending. The risk is regulated, not zero.
How do I find out how much of the lending income goes to the fund?
In the fund prospectus or Annual Report, look for the "securities lending" section. Transparent managers such as iShares or Vanguard publish the exact percentage split between the fund and the manager.