FT: seclending earnings dwarf fees in some ETFs

Unusually large securities lending revenues at a clutch of exchange trade funds dwarfed their annual management fees by a factor of five last year. The ETFs that generated the largest lending revenues were concentrated in the cryptocurrency, cannabis and clean energy sectors.

The $4.5mn Invesco Alerian Galaxy Crypto Economy ETF (SATO) earned a sum equivalent to 3.2% of its assets from securities lending last year, Morningstar found, amounting to 524% of its 61 basis point net expense ratio.

It was followed by the $44 million Global X Cannabis ETF (POTX), with revenues of 2.87%, 562% of its 51bp fee, and the $45 million VanEck Digital Transformation ETF (DAPP), with 2.81%, 561% of its 50bp levy.

“Fees become substantial when short interest grows, increasing demand while the borrowing supply dwindles. In this case, it led to significant lending returns for these funds,” said Bryan Armour, director of passive strategies research, North America at Morningstar, speaking to the Financial Times.

Overall, Morningstar identified 20 US-listed ETFs that received lending revenues of at least 0.59% of their assets last year, a list heavily skewed to the digital assets and technology sectors that bore the brunt of the market crash.

Only one of the 20 — the $151 million iShares Interest Rate Hedged High Yield Bond ETF (HYGH), the sole fixed income fund on the list — beat the 19.4% decline in the Morningstar US Market Index. HYGH lost just 1%, with its 85bp of lending revenues almost twice its 51bp fee.

Invesco dominated the upper echelons of the list, with five of the top 10 ETFs by lending revenue as a percentage of assets. “Every fraction of a basis point counts and if we have an opportunity to return some money to our shareholders we will do that,” said Anna Paglia, global head of ETFs and indexed strategies at Invesco, who said it returned more than $100mn to fund investors in lending revenues last year.

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