Securities lending is the practice whereby mutual funds and exchange-traded funds (ETFs) lend out their securities to short sellers. I have voiced some concerns about this practice before in previous blog posts and columns.
In short, many mutual funds and ETFs:
Keep all, or some part, of the lending fees
Lend against collateral of lower quality than government bonds (raising risk)
Subject their securities to downward price pressures (by aiding short selling).
Such practices would not raise questions if the funds owned the securities. But they don’t: The securities are owned by the unitholders. The funds just hold them in trust for their unitholders.
Not all mutual funds and ETFs lend out their securities. Those set up as Unit Investment Trusts are restricted from this practice. They include four of the oldest and biggest ETFs:
Hat tip to this site.