ETFs’ Hidden Source of Return—Securities Lending
ETFs’ Hidden Source of Return—Securities Lending
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Legally, exchange-traded and mutual funds can lend out as much as 50% of their unlevered securities’ portfolios to borrowers who pay them interest.
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Consider two ETFs tracking the same benchmark—the $1.3 billion Vanguard Russell 2000(ticker: VTWO) and the $41 billion iShares Russell 2000(IWM). Vanguard’s expense ratio is 0.15%, and iShares’, 0.2%, yet over the past five years, iShares has delivered an 11.90% annualized return, compared with Vanguard’s 11.89%. Meanwhile, the Russell 2000 benchmark has underperformed both ETFs with a 11.84% return.

Securities lending largely explains these differences in performance. The iShares ETF had $4.8 billion of its securities on loan, according to its 2017 annual report, and average assets of $31.7 billion during that fiscal year. For that lending, the fund received $68 million in interest. That interest equaled 0.21% of the ETF’s assets—enough to cover its entire expense ratio. Hence, it outperformed the Russell benchmark.

In contrast, the Vanguard ETF had only $25.1 million on loan during its fiscal 2017, on average assets of $1.4 billion. For its loans, it received $1.9 million in interest, which translates to an interest rate of 0.14%. So the iShares ETF’s greater yield allowed it to outpace Vanguard’s fund, despite having a higher expense ratio.

Yet a crucial distinction must be recognized here. Vanguard lent only 2% of its assets, versus iShares’ 15%. That added lending courts added risks.

With any loan, there is a chance of borrower default. ETFs, however, have regulatory safeguards. Loans must by law be fully collateralized; in fact, in standard practice, they are overcollateralized, which means that fund companies collect more money than the value of the stocks they lend out—102% of the value of U.S. stocks, slightly more for foreign shares, all of which is adjusted daily for stock- price fluctuations. Moreover, portfolio managers scrutinize the credit quality of every borrower. Still, lending 15% of assets is riskier than 2%.
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Unlike Vanguard and Charles Schwab, which return all lending proceeds to their ETF shareholders, BlackRock keeps a portion of ETF lending income for itself, from 20% to 28.5% depending on the fund. Moreover, most ETF managers invest lending collateral in affiliated money-market funds, allowing firms to collect additional fees and creating another incentive to overlend. Of the largest five ETF players, only Schwab invests collateral in nonaffiliated money market funds.
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https://www.barrons.com/articles/etfs-hidden-source-of-returnsecurities-lending-1523054918
https://www.barrons.com/articles/etfs-hidden-source-of-returnsecurities-lending-1523054918

Labels: Oleg Zabluda

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Backpage is a classified advertising website launched in 2004. Until its seizure by U.S. authorities in April 2018, it offered classified listings for a wide variety of products and services including automotive, jobs listings, and real estate. In 2011, Backpage was the second largest classified ad listing service on the Internet in the United States after Craigslist.

The site's offering of adult services sections had been highly controversial, due to allegations that Backpage knowingly allowed and encouraged users to post ads related to prostitution and human trafficking, particularly involving minors, and took steps to intentionally obfuscate the activities. After a series of court cases and the arrest of the company's CEO and other officials, Backpage removed the adult services subsection in the United States in 2017.

On 6 April 2018 backpage.com and affiliated websites were seized as part of an enforcement action by the Federal Bureau of Investigation, the U.S. Postal Inspection Service, the United States Department of Justice, the Internal Revenue Service Criminal Investigator Division, with analytical assistance from the Joint Regional Intelligence Center.

Its CEO, Carl Ferrer, pleaded guilty to charges of facilitating prostitution and money laundering.
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https://en.wikipedia.org/wiki/Backpage
https://en.wikipedia.org/wiki/Backpage

Labels: Oleg Zabluda

- posted by Oleg Zabluda @ 2:47 PM | permalink | | | technorati | bloglines | feedster