Vanguard considers sec lending’s contribution
30 June 2016 New York
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The securities lending industry arguably receives a disproportionate amount of regulatory attention compared to the average contribution its business brings, a Vanguard Research Group whitepaper has suggested.
Vanguard found that the analysed funds’ securities lending activity has remained steady. On-loan securities volumes were consistent throughout the report’s sample data range (2007 to 2014), other than an unsurprising spike during the finance crisis.
The whitepaper was created using a case study of 1,193 US index funds and exchange-traded funds from Morningstar over the eight-year period.
Securities lending has also remained a relatively minor part of overall business, according to Vanguard.
In 2014, total index-fund assets on loan were almost $68 billion, while for active funds the figure was about $36 billion, representing about 2 percent and less than 1 percent of fund assets, respectively.
Vanguard said in the whitepaper: “[Those figures] could seem either surprisingly low—given the high level of attention paid to securities lending in recent years—or not surprising, given the US SEC’s strict securities lending guidelines for regulated funds and the fact that securities lending actually tends to make up a relatively small portion of an asset manager’s operations.”
But securities lending remains a beneficial business, despite its size. Vanguard argued: “Considering that our index funds from the full sample had a weighted-average expense ratio of 23.6 basis points (bps) in 2014, the weighted-average lending impact of 2.7 bps helped offset more than 10 percent of the expense ratio in the same year.”
“This is a significant benefit, because expense ratio is a critical determinant of an index fund’s return relative to its benchmark index.”
Vanguard found that the analysed funds’ securities lending activity has remained steady. On-loan securities volumes were consistent throughout the report’s sample data range (2007 to 2014), other than an unsurprising spike during the finance crisis.
The whitepaper was created using a case study of 1,193 US index funds and exchange-traded funds from Morningstar over the eight-year period.
Securities lending has also remained a relatively minor part of overall business, according to Vanguard.
In 2014, total index-fund assets on loan were almost $68 billion, while for active funds the figure was about $36 billion, representing about 2 percent and less than 1 percent of fund assets, respectively.
Vanguard said in the whitepaper: “[Those figures] could seem either surprisingly low—given the high level of attention paid to securities lending in recent years—or not surprising, given the US SEC’s strict securities lending guidelines for regulated funds and the fact that securities lending actually tends to make up a relatively small portion of an asset manager’s operations.”
But securities lending remains a beneficial business, despite its size. Vanguard argued: “Considering that our index funds from the full sample had a weighted-average expense ratio of 23.6 basis points (bps) in 2014, the weighted-average lending impact of 2.7 bps helped offset more than 10 percent of the expense ratio in the same year.”
“This is a significant benefit, because expense ratio is a critical determinant of an index fund’s return relative to its benchmark index.”
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