What is Securities Lending?

Many funds engage in securities lending, which is a well-established, but opaque, practice that introduces more risk into the equation

Hortense Bioy, CFA 23 August, 2012 | 2:09PM Gordon Rose, CIIA, CAIA,

Securities lending is the process of temporarily loaning securities to a third party in exchange for a fee. Securities are normally lent on an open basis with no fixed maturity date, which gives lenders the flexibility to recall their securities at any time.

In the context of physically-replicated ETFs, lending out a fund’s holdings can help to partially, or in some cases completely, offset management fees and other sources of tracking error. As such, revenues generated from securities lending can be seen as a potential source of alpha.

While mutual funds, pension funds and insurance companies tend to be the biggest lenders of assets, ETFs and other passively-managed funds are also particularly popular among borrowers. This is because they have lower turnover than actively-managed funds and hence are less subject to the risk that the fund manager will recall the loaned securities.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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