It’s a common practice among asset managers, and can include mutual funds, both active and passive, along with trusts, pensions, insurance, sovereign wealth funds, and so on. The asset managers lend securities from their portfolios to banks and broker-dealers, whose clients, in turn, use the borrowed securities for short selling or other strategies.
In exchange, the lending asset manager gets a fee and collateral. The latter, usually cash, is reinvested in fixed income investments for additional revenue. That additional revenue is typically very modest.
However, an effective securities lending program can generate additional income for fund investors that meaningfully offsets a fund’s expense ratio. Lending revenue becomes a more prominent differentiator as operating expenses continue to fall, due largely to “the Vanguard effect.”1