Thursday, 25 February 2010

Three ETFs that have No Securities Lending Issues

On and off people like Larry MacDonald in Investors: Wake Up to Securities Lending have noted abuses and dangers of the common practise amongst ETF managers to lend out the securities in the portfolio to short-sellers and thereby gain fees, either for the benefit of the ETF holders or of the managers.

Three prominent US ETFs do no securities lending at all by virtue of being set up as Unit Investment Trusts, as opposed to the prevalent Open-End fund structure of most ETFs. UITs are much more restricted by regulation as the Nasdaq website notes in ETF Product Structures. The three ETFS?
With such rock-bottom MERs, investors have little need for securities lending to lower their costs. The prohibition against lending in the very structure adds the comfort of knowing that the fund managers won't be tempted to scoop lending fees using the investors' assets at the investors' risk. The fact that these ETFs are the oldest too brings to mind the hoary but true saying, "if it ain't broke, don't fix it".

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