Stock lending & ETFs

New rules from the European Securities Markets Authority could result in the fees for Exchange Traded Funds (ETFs) being increased, as all profits from stock lending are returned to investors.

Stock lending is a common practice for ETFs and tracker funds, with the fund manager allowing other managers to borrow a few of their assets in return for a fee.

This fee from stock lending is used to reduce the charges on these funds, and also to put additional revenue in the pocket of the fund manager.

It is worth noting that stock lending is already well regulated in Europe.

When stocks are lent out, some collateral equal to their value is received in return. This means if the stocks are not given back as agreed, the fund manager and investors at least have another asset of equivalent value.

It is quite right that investors are rewarded for the risks associated with stock lending, but the ESMA proposals potentially take this a step too far, as the fund manager should also be rewarded for increasing profits for investors.

Photo credit: Flickr/Jason Blait