Nearly two-thirds of ETF investors polled by BBH would
consider engaging in securities lending.
The Boston-based bank, in partnership with ETF.com, quizzed
over 175 advisors and institutional managers on how ETFs will
be used in the future.
64% of respondents said they would invest in an ETF that
makes short-term loans of stocks or bonds, often to hedge funds
or prime brokers.
Those who would not invest cited concerns around
counterparty risk and collateral reinvestment risk.
Index tracking funds run by BlackRock, State Street,
Vanguard and Invesco engage in securities lending in a bid to
incrementally increase returns for shareholders, lower expenses
and boost liquidity.
Each firm has put effort into educating investors on the
practice, which has struggled to shake off a risky reputation
post financial crisis.
BBH’s experts reckon there an opportunity for
ETF sponsors to "better educate advisors" on the prospective
benefits that a well-managed lending program can have for
investors, such as expense management and improving tracking
The US ETF securities lending market is worth about
USD$100bn, with 30% of that total on loan at any one time.
Europe by comparison is just one quarter of that size.
Currently 85% of ETFs with operating expense ratios less
than 50 bps engage in securities lending, according to BBH
analysis based on Morningstar data.
"From my point of view, the idea of securities lending is
not bad at all," wrote Detlef Glow, head of EMEA Research
at Lipper, in a recent online post.
"But to follow this strategy with securities held in a
mutual fund, which is owned by long-term retail investors who
can’t evaluate the risk of this kind of activity,
is a bad idea, especially when the revenue from securities
lending is shared between the fund promoter and the
ETFs are also increasingly being offered to fulfil the
other side of the security lending trade as collateral,
particularly in Europe.