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ETF investors growing comfortable with securities lending

11 January 2017

Two thirds of investors in BBH study would invest in an ETF with a securities lending programme

Read more: ETFs securities lending

Nearly two-thirds of ETF investors polled by BBH would consider engaging in securities lending.

The Boston-based bank, in partnership with, 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 error.

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 investor."

 ETFs are also increasingly being offered to fulfil the other side of the security lending trade as collateral, particularly in Europe. 

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