How ETF Securities Lending Works: Revenue, Risks, Disclosure

What securities lending is, in one paragraph

A fund that lends does not sell. It transfers securities temporarily to a borrower — usually a broker-dealer that needs them to settle a short sale or hedge a position — in exchange for collateral and a fee. The fund keeps the economics of ownership: while the securities are out, the borrower pays the equivalent of any dividends or interest paid on them.

BlackRock describes the mechanism on its iShares fund pages this way: the borrower posts collateral in the form of "shares, bonds or cash" and pays a fee, and that fee "provides additional income for the fund and thus can help to reduce the total cost of ownership of an ETF" (iShares $ Treasury Bond 0-1yr UCITS ETF).

That is the whole idea. Everything else is about three questions: who keeps the fee, what collateral is posted, and what the fund tells you.

How big the business is

Lenders worldwide earned $9.64 billion of securities lending revenue in 2024, down 10.3% from the $10.74 billion generated in 2023, according to DataLend, the market-data service of EquiLend (DataLend release). The same release reports that equity lending revenue fell 13% globally, with EMEA down 24%, and that DataLend tracks about $35 trillion of lendable assets against $2.6 trillion actually on loan.

Those are totals across all institutional lenders — pension funds, insurers, asset managers — not ETF revenue. For a single broad index ETF the number is measured in basis points, and often single digits. The iShares US Treasury 0-1yr UCITS ETF earned a securities lending return of 0.04% of assets in the 12 months to 30 June 2026, with an average of 34.17% of the fund lent out and a maximum of 61.85% (iShares IB01 fund page). A euro government bond ETF from the same provider shows a similar 0.04% return with an average on-loan balance of 36.71% (iShares € Govt Bond 1-3yr UCITS ETF).

The pattern is worth internalising: high on-loan percentages do not automatically mean high income. Lending pays well when a specific security is scarce and in demand, not when a fund lends a lot of ordinary holdings. Small-cap, emerging-market and niche thematic funds carry more of that scarcity premium — and more of the associated risk.

Who keeps the revenue

The EU rule is a principle, not a fixed split

For UCITS funds sold in the EU, the ESMA guidance on ETFs and other UCITS issues states that all revenues arising from efficient portfolio management techniques — which includes securities lending — must, net of direct and indirect operational costs, be returned to the fund (ESMA guidelines, ESMA/2014/937). The fund's prospectus is also required to disclose its policy on the direct and indirect operational costs and fees that may be deducted from that income.

Because "operational costs" is not defined numerically, disclosed splits diverge sharply. The investor group BETTER FINANCE, analysing fund documents, found returns to the fund in its 2021 sample ranging from roughly 60% to 98% of gross lending income, with the remainder attributed to lending agents and costs (BETTER FINANCE, Securities Lending Income Attribution, 2022). BlackRock's European iShares funds retain 62.5% of lending income, while BlackRock receives 37.5% and covers all operational costs of the programme (iShares fund disclosure). In Canada, iShares ETF unitholders receive 60% of gross lending revenue, with lending agents retaining 40% and paying programme costs out of their share (BlackRock Canada, Securities Lending).

Vanguard's model: keep the costs separate

Vanguard states that it returns all securities lending revenue, net of the expenses it incurs running the programme, so about 97% of gross revenue reaches fund shareholders; it puts its own programme costs at around 3% (Vanguard, a client-centric approach to securities lending). In its own 2024 reporting, 95.2% of revenue was returned to funds (Vanguard, understanding securities lending).

The practical difference between the two approaches is not the headline percentage alone. A flat split compensates the manager for scale, technology and risk oversight. A cost-reimbursement model shifts the question to whether the expenses charged are verifiable. Either way, the deduction should be disclosed, and the lending agent is often an affiliate of the fund manager — a conflict the disclosure is meant to expose.

Collateral and recall: where the risk control sits

Collateral is the fund's protection if a borrower fails. US fund prospectuses typically describe the standard: cash or high-grade collateral of at least 102% of the value of domestic securities and 105% for international securities, marked to market daily, with additional collateral required if the loaned securities rise in value (First Trust registration statement, SEC EDGAR). The same filings note that loans can be terminated at any time by either side.

The iShares pages report the outcome rather than the rule: collateralisation of 109.66% of loan value for the Treasury ETF and 109.40% for the euro government bond ETF in the year to 30 June 2026, both examples well above the 102-105% floors (IB01; IBGS).

In the EU, the ESMA guidelines add detail that is genuinely useful for reading disclosures. Collateral must be highly liquid and priced transparently, valued at least daily, and subject to conservative haircuts where volatile. It must be issued by an entity independent of the counterparty and not highly correlated with it, and exposure to a single issuer must not exceed 20% of the fund's net asset value per counterparty basket. Non-cash collateral must not be sold, reinvested or pledged. Cash collateral may only be placed on deposit with prescribed institutions, invested in high-quality government bonds, used in reverse repo with supervised credit institutions, or held in short-term money market funds. Funds receiving collateral worth at least 30% of assets must run a documented liquidity stress-testing policy (ESMA guidelines).

The guidelines also require the fund to be able to recall any security on loan at any time, and require lending exposure to counterparties to be combined with over-the-counter derivative exposure when counterparty risk limits are calculated — which is why a fund using both cannot treat them as separate budgets.

Reading two fund pages side by side

What disclosures actually tell you

Fund documents answer four questions. If any of them is missing or vague, that is itself information.

• On-loan percentage: the disclosed average and maximum share of fund assets lent out. A maximum near 60% means the fund accepts meaningful operational and liquidity load, even if the average is lower.
• Collateral policy: permitted collateral types, haircuts, the collateralisation level, and whether cash collateral is taken at all. Cash collateral brings reinvestment risk; securities collateral does not.
• Revenue split: the percentage retained by the fund and the identity of the lending agent, including whether it is affiliated with the manager. In the EU this belongs in the prospectus.
• Recall and controls: the policy for recalling loans before voting or before a dividend, plus any limits per borrower or per counterparty.

Risks and costs

Counterparty and agent risk

The borrower may fail to return securities. Many agreements place borrower-default risk on the lending agent, but the fund still carries the risk that the agent itself fails to honour its obligations — a distinction laid out in fund prospectuses (Nuveen registration statement, SEC EDGAR). Collateral reduces, but does not eliminate, the loss: if the borrower defaults and collateral has to be liquidated into a falling market, the recovery may be less than the value lent.

Cash collateral reinvestment

Where cash collateral is accepted, the fund invests it and pays a rebate to the borrower. If the reinvestment loses money — a real possibility in a rate or credit shock — the fund absorbs the shortfall. Prospectuses state the risk directly: the fund "may lose money on its investment of cash collateral or may fail to earn sufficient income on its investment to meet its obligations to the borrower" (SEC filing). EU rules limit where that cash may be placed, but they do not remove market risk from it.

Recall and liquidity

Loans are recallable, but recall takes time to settle. If a fund has lent a large share of a thinly traded holding and needs to sell during stress — to meet redemptions, for example — it may not be able to sell instantly. That is the core argument advanced by providers for conservative on-loan limits, and the reason the maximum on-loan figure, not the average, is the more revealing number.

Voting, dividends and tax

While securities are on loan, voting rights transfer to the borrower; funds typically recall loans when a vote is material. Substitute payments made to the fund in place of dividends have tax consequences: in the US, payments in lieu of dividends do not count as qualified dividends and can therefore be taxed at a higher rate than the underlying dividend would have been (SEC filing). Some funds recall loans before dividend dates to avoid this. Investors in taxable accounts in the US should treat it as a real, if usually small, drag; treatment differs by jurisdiction, and in the EU or UK the effect depends on the fund's domicile and the investor's residence.

The cost of the split

A 37.5% agent share on 4 basis points is a negligible absolute cost. It matters proportionally: for a fund earning a few basis points from lending, shifting from a 97% to a 62.5% retention rate changes the net benefit by roughly a third, which can show up in tracking difference rather than in the headline fee. Lending revenue and its split are part of total cost of ownership, alongside the expense ratio — see TER vs Total Cost of Ownership — and they also interact with the creation and redemption process that keeps an ETF's price near NAV (ETF Creation and Redemption).

Bottom line

Securities lending is a small line item with real risk machinery behind it. For most broad index funds the revenue is measured in single-digit basis points and should not drive a fund choice; what deserves attention is the structure. Read the on-loan maximum, the collateralisation level and haircut policy, the revenue split and the identity of the lending agent, and whether cash collateral is reinvested. Funds that disclose all four clearly, with conservative on-loan limits and no cash collateral, are easier to assess than funds that leave the split or the agent unnamed. On our research watchlist, the disclosures worth comparing across providers are exactly those four figures — they are public, and they vary far more than the headline expense ratios do.