In finance, securities lending involves a transfer of securities (such as stock shares or bonds) to a borrower, who gives the lender collateral (which can include shares, bonds or cash). The borrower pays the lender a fee each month for the loan and is contractually obliged to return the securities on demand.
In the U.S. the principal parties involved in security lending are the lender, the borrower, and in most instances, the agent lender.
Lenders are typically large-scale investors, such as pension funds, insurance companies, collective investment schemes and sovereign wealth funds. These investors would normally employ an agent (such as a custodian) to arrange, manage and report on the lending activity.
Borrowers are typically large financial institutions, such as investment banks, market makers and broker dealers. Hedge funds are among the largest borrowers of securities, but they will borrow through investment banks or broker dealers rather than directly from the investor.
Index mutual fund managers often use security lending income as a means of offsetting portfolio management costs. Firms usually pass along all, or a portion of security lending income to the fund portfolio.
Dimensional Fund Advisors, T. Rowe Price, and Vanguard pass along 100% of after-cost security lending income to the mutual fund/ETF investor. (Vanguard states that the average cost of the firm’s security lending program represents 5% of the program’s income; the industry average cost is 50% of income).
State Street passes along 85% of security lending income for eligible portfolios. Note that funds organized as grantor trusts (e.g. the SPDR S&P 500 and SPDR S&P Mid Cap 400 ETF) are forbidden from loaning securities. Blackrock iShares pass along 70% to 75% of security lending income to its iShares ETF investors.
Vanguard security lending
The tables below provide examples of expense offsets from the 2014 fiscal year results of Vanguard index fund security lending programs.
Vanguard lends stock investments. The firm does not lend out fixed income securities.
Note that Vanguard runs its own security lending program, bypassing agent lenders. The firm elects to deal directly with borrowers, loans out illiquid stocks to reap premiums, and runs its own collateral investment program using its Market Liquidity Fund. Vanguard allocates 100% of security lending income to its funds.
Vanguard index fund security lending income
Income derived from security lending by Vanguard index mutual funds is tabulated below. The figures show that for US stock market funds, those funds holding small cap stocks tended to have more security lending income than funds holding large cap stocks.
International stock funds also received high security lending income.
Vanguard also offers exchange-traded funds that cover US stock market sectors and suites of Russell and S&P Indexes. Security lending income for these funds are found in the subsequent tables.
| Fund | Security lending income | Fund expenses | Ratio of security lending income/fund expenses |
| Vanguard Total Stock | $76,099,000.00 | $301,673,000.00 | 25.23% |
| Vanguard 500 | $3,101,000.00 | $121,344,000.00 | 2.56% |
| Vanguard Large | $314,000.00 | $8,502,000.00 | 3.69% |
| Vanguard Growth | $2,588,000.00 | $40,312,000.00 | 6.42% |
| Vanguard Value | $586,000.00 | $30,285,000.00 | 1.93% |
| Vanguard Extended | $37,478,000.00 | $35,412,000.00 | 105.83% |
| Vanguard Mid Cap | $8,964,000.00 | $48,557,000.00 | 18.46% |
| Vanguard Mid Growth | $707,000.00 | $5,027,000.00 | 14.06% |
| Vanguard Mid Value | $930,000.00 | $6,041,000.00 | 15.39% |
| Vanguard Small | $33,449,000.00 | $46,794,000.00 | 71.48% |
| Vanguard Small Growth | $17,517,000.00 | $16,980,000.00 | 103.16% |
| Vanguard Small Value | $4,741,000.00 | $15,112,000.00 | 31.37% |
| Specialty | |||
| Vanguard High Dividend Yield Index | $304,000.00 | $14,213,000.00 | 2.14% |
| Vanguard Dividend Appreciation Index | $207,000.00 | $25,907,000.00 | 0.80% |
| Vanguard REIT Index | $823,000.00 | $56,350,000.00 | 1.46% |
| International | |||
| Vanguard European Stock | $17,179,000.00 | $26,220,000.00 | 65.52% |
| Vanguard Pacific Stock | $1,502,000.00 | $6,878,000.00 | 21.84% |
| Vanguard Emerging Markets Stock | $31,944,000.00 | $94,737,000.00 | 33.72% |
| Vanguard Total International Stock | $100,793,000.00 | $195,233,000.00 | 51.63% |
| Vanguard FTSE AW ex-US Stock | $14,920,000.00 | $29,289,000.00 | 50.94% |
| Vanguard FTSE AW ex-US Small-Cap Stock | $3,611,000.00 | $5,037,000.00 | 71.69% |
| Vanguard Total World Stock | $1,978,000.00 | $9,159,000.00 | 21.60% |
| Vanguard Global ex-US Real Estate | $1,174,000.00 | $4,823,000.00 | 24.34% |
Vanguard sector index fund security lending
| Fund | Security lending income | Fund expenses | Ratio of security lending income/fund expenses |
| Vanguard Consumer Discretion | $196,000.00 | $1,592,000.00 | 12.31% |
| Vanguard Consumer Staples | $55,000.00 | $2,275,000.00 | 2.42% |
| Vanguard Energy | $348,000.00 | $3,958,000.00 | 8.79% |
| Vanguard Financials | $93,000.00 | $2,401,000.00 | 3.87% |
| Vanguard Health Care | $631,000.00 | $3,618,000.00 | 17.44% |
| Vanguard Industrials | $118,000.00 | $1,968,000.00 | 6.00% |
| Vanguard Information Technology | $526,000.00 | $5,966,000.00 | 8.82% |
| Vanguard Materials | $130,000.00 | $1,491,000.00 | 8.72% |
| Vanguard Telecommunications Services | $106,000.00 | $781,000.00 | 13.57% |
| Vanguard Utilities | $14,000.00 | $2,276,000.00 | 0.62% |
Vanguard exchange-traded index fund security lending
| Fund | Security lending income | Fund expenses | Ratio of security lending income/fund expenses |
| Vanguard Mega Stock | $11,000.00 | $997,000.00 | 1.10% |
| Vanguard Mega Growth | $37,000.00 | $1,389,000.00 | 2.66% |
| Vanguard Mega Value | $0.00 | $939,000.00 | 0.00% |
| Vanguard Russell 3000 | $20,000.00 | $555,000.00 | 3.60% |
| Vanguard Russell 1000 | $30,000.00 | $1,023,000.00 | 2.53% |
| Vanguard Russell 1000 Growth | $53,000.00 | $1,290,000.00 | 4.11% |
| Vanguard Russell 1000 Value | $41,000.00 | $1,095,000.00 | 3.74% |
| Vanguard Russell 2000 | $537,000.00 | $769,000.00 | 69.83 |
| Vanguard Russell 2000 Growth | $274,000.00 | $345,000.00 | 79.42% |
| Vanguard Russell 2000 Value | $57,000.00 | $186,000.00 | 30.56% |
| S&P 500 Growth | $1,000.00 | $337,000.00 | 0.30% |
| S&P 500 Value | $1,000.00 | $227,000.00 | 0.44% |
| S&P Mid Cap 400 | $92,000.00 | $747,000.00 | 12.32% |
| S&P Mid Cap 400 Growth | $44,000.00 | $556,000.00 | 7.91% |
| S&P Mid Cap 400 Value | $16,000.00 | $101,000.00 | 15.84% |
| S&P Small Cap 600 | $35,000.00 | $342,000.00 | 10.23% |
| S&P Small Cap 600 Growth | $0.00 | $101,000.00 | 0.00% |
| S&P Small Cap 600 Value | $0.00 | $123,000.00 | 0.00% |
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