Securities Lending
The temporary transfer of stocks or bonds to a borrower in exchange for collateral and a lending fee.
What is Securities Lending?
Securities lending is the temporary transfer of stocks, bonds, or other securities from an owner (typically an institutional investor such as a pension fund, mutual fund, or ETF) to a borrower (typically a broker-dealer or hedge fund) in exchange for collateral — usually cash or other securities — plus a lending fee. The borrower most often uses the securities to cover a short sale: it sells the borrowed securities in the market, hoping to repurchase them at a lower price before returning them to the lender. The lender earns incremental income from the fee, and cash collateral can be reinvested for additional return. Major custodian banks administer securities lending programs on behalf of institutional clients, creating a multi-trillion-dollar global market.
Example
Vanguard's Total Stock Market ETF participates in a securities lending program administered by its custodian. When a hedge fund short-selling GameStop stock in early 2021 needed to borrow shares, it paid an annualized lending fee of 30–100% of the share price to the lender. The ETF earned this lending revenue — which Vanguard passes through to shareholders — partially offsetting the fund's expense ratio.