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Vanguard starts securities lending

Index tracking funds and ETFs
mc2fool
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Vanguard starts securities lending

#23040

Postby mc2fool » January 14th, 2017, 2:21 pm

From this week's IC:

"ETF provider Vanguard is allowing 16 of its London-listed exchange traded funds (ETFs) to lend securities. Prior to 21 November 2016 no Vanguard ETFs lent out the assets they held, a practice that a number of ETFs engage in to generate extra income, but which is disliked by some investors due to the additional risk it incurs." http://www.investorschronicle.co.uk/201 ... ticle.html

Lootman
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Re: Vanguard starts securities lending

#23080

Postby Lootman » January 14th, 2017, 5:19 pm

mc2fool wrote:From this week's IC:

"ETF provider Vanguard is allowing 16 of its London-listed exchange traded funds (ETFs) to lend securities. Prior to 21 November 2016 no Vanguard ETFs lent out the assets they held, a practice that a number of ETFs engage in to generate extra income, but which is disliked by some investors due to the additional risk it incurs." http://www.investorschronicle.co.uk/201 ... ticle.html

The fact that securities lending may be "disliked by some investors due to the additional risk it incurs" is a pretty snide way of trying to imply that there are risks involved without presenting any reasons why such an alleged risk actually exists.

It's equally possible that there is no risk, and the "dislike" that "some investors" feel is irrational. IC could have listed the occasions when ETFs have lost money because of these risks. Except that, to my knowledge, there have been no such losses either in the UK or the US. And that is despite the fact that assets managed by ETFs are now over $3 trillion globally and most of the big ones engage in securities lending.

hiriskpaul
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Re: Vanguard starts securities lending

#23152

Postby hiriskpaul » January 14th, 2017, 11:54 pm

In theory there are risks with stock lending. I have read somewhere that over the last 35 years or so BlackRock, currently the World's largest fund manager with a truly massive stock lending program, have suffered 3 defaults. However, there was sufficient collateral on each occasion to cover the loss and (I assume) repurchase the lent security. It is in theory possible for the value of the collateral to drop below the value of the lent stock and for the borrower to default before supplying additional collateral. But if that were to happen, iShares have guaranteed that they would cover any loss to the affected fund(s), so iShares would need to default as well before fund holders lost any money. For iShares to default on their guarantee would mean something very traumatic is likely to have happened to the market or some huge fraud had taken place, implying a loss from stock lending might be the least of fund holders concerns.

As Lootman has said, none of this has happened yet so it is very hard to quantify the risk and likely loss if it ever happened.

Personally I welcome this news. BlackRock/iShares generate useful extra income from stock lending for their funds and ETFs, but pocket a third of the revenue. If Vanguard pay the entire net proceeds into the ETF it could make a significant dent in the already low fees and put additional pressure on competitors to follow suit.

The IC comment does seem strange. Do they ever comment in such a derogatory way about OEICs/ITs that lend stock?

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Re: Vanguard starts securities lending

#23155

Postby Lootman » January 15th, 2017, 12:09 am

hiriskpaul wrote:In theory there are risks with stock lending. I have read somewhere that over the last 35 years or so BlackRock, currently the World's largest fund manager with a truly massive stock lending program, have suffered 3 defaults. However, there was sufficient collateral on each occasion to cover the loss and (I assume) repurchase the lent security.

Yes. A number of years I worked on a stock lending program. It wasn't for ETFs but that doesn't really matter. As you say, there is a requirement for collateral to be posted. In our case, that was 110% of face value in Repurchase Agreements for Government Securities.

So to take your example, not only would BlackRock have to become insolvent but those government securities would have to become illiquid. It's disappointing to see IC trotting out this kind of fear-mongering without at least making the effort to describe how it could happen.


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