ETFs are generally lauded for their low cost to investors. But as they’ve become more popular, they’ve also been cited by some industry participants as a potential danger.
Now ETFs are being called out for a lack of transparency.
That’s because some ETFs practise securities lending, whereby they “lend out up to a third of their holdings in return for a fee and collateral,” reports Rachel Evans in Bloomberg. “Those payments [come] from borrowers [who] want to make a bet on a security then contribute to the fund’s returns.”
Most issuers don’t publicize this lending or its revenue, reports Evans, for fear of scaring off investors with the additional risk. And some issuers do not share all revenue with unitholders.
Read: How to use ETF Facts
Brad Lamensdorf, CEO of a small ETF startup, told Bloomberg that investors should pay closer attention to what ETF providers do with their holdings, saying, “People don’t realize how much these companies are taking from them.”
Advisor.ca asked the top-five Canadian ETF providers about securities lending, and so far two have responded. An Invesco spokesperson says that some PowerShares ETFs use securities lending, with 100% of net revenues flowing back to unitholders. Vanguard says that its “ETFs in Canada don’t currently conduct securities lending.”
Read the full article on Bloomberg.
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