Securities Lending Provides Value. But Is It Enough To Make a Bad Fund Good?

Morningstar

Zachary Evens, Lan Anh Tran

Research

9 Pages

Morningstar explains how securities lending works inside mutual funds and ETFs and what it means for investors who own those funds. The article covers why funds lend securities, how collateral and revenue sharing are structured, and which safeguards aim to keep risks contained. It also suggests what investors should review in fund documents before relying on lending income.

Date published: August 30, 2023

Key Takeaways

Lending mechanics: Funds temporarily lend portfolio holdings to borrowers for a fee while holding collateral as protection.
Benefits and risks: Extra lending income can modestly boost returns but introduces counterparty and collateral reinvestment risks.
Due diligence points: Investors should examine collateral quality, revenue splits, lending limits, and recall policies around proxy votes.
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