After iShares–the exchange-traded fund (ETF) arm of the world’s largest asset manager, BlackRock–announced last year that it has scrapped its self commitment on the percentage of securities held by the firm that can be lent to third parties, Vanguard announced recently that it also will increase its involvement in securities lending. This step is rather surprising, since securities lending by ETFs is one of the main points raised by critics, and this step by Vanguard may once again fuel the discussion about possible systematic risks associated with ETFs. The increasing securities-lending activity may be the answer for fund promoters to the falling income from management fees, since these fees could further decrease and put pressure on ETF promoters’ profitability. But not all ETF promoters use securities lending in their funds; HSBC for example has introduced a ban on securities lending, while UBS ETF continues its limit of the maximum percentage of securities that can be lent.
Since securities lending is a normal technique in modern portfolio management, it might be surprising that there is so much discussion around this topic. There are positive effects for the overall markets that come from securities lending, since it makes the markets more efficient by creating additional liquidity through the trades that need to be done to sell and buy back the borrowed securities. Another positive impact comes from the fact that short-sellers try to sell stocks that look overvalued for any reason. These transactions might help prevent single stocks from reaching exorbitant valuations for no reason.
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