BBH: 19 of 20 US ETF sponsors participate in securities lending, representing 99% of the $5 trillion market

ETFs are playing a pivotal role in the securities lending market, growing revenue by 34 percent in 2020, according to data firm IHS Markit. What’s more, 19 of 20 U.S. ETF sponsors, representing 99% of the $5 trillion ETF market, participate in securities lending. These firms have traditionally played the biggest role in securities lending because they have a broad portfolio of securities to lend. With the mounting competitive fee pressures on index funds, the additional returns that securities lending can generate help defray the low cost of these products.

Demand for ETFs continue to attract investor interest, according to the Brown Brothers Harriman 2021 Global ETF Investor Survey, with 72 percent of investors saying they plan to increase their allocation in the next 12 months. In addition, 80 percent of respondents to the BBH survey said they planned to increase their exposure to thematic ETFs, with internet and technology ETFs receiving the most investor interest.

With AUM in thematic ETFs surging, managers could have an opportunity to earn significant revenue through lending their underlying securities. Many newer funds are now reaching the informal $100 million AUM threshold at which many managers believe securities lending becomes practicable. For technology ETFs in particular, the recent demand from short sellers for certain stocks including GameStop and Tesla illustrate opportunities for generating securities lending revenue streams.

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