Expert insight
The value of securities lending in three charts
June 11, 2024
Securities lending is a common practice among index funds, but the value it provides goes largely unrecognized. As a complement to a recent Q&A we posted about Vanguard’s approach to securities lending, here we quantify how much securities lending income has added to fund returns, demonstrate the benefits of our value-based approach, and illustrate how much securities lending income can help offset some of a fund’s expense ratio.
Return enhancement
In recent years, the average enhancement to fund returns from securities lending income has been between 1 and 9 basis points, with the amount of the enhancement inversely related to market capitalization. (A basis point is one hundredth of a percentage point.) The return earned by Vanguard funds broadly aligns with that of the industry.
For Vanguard funds and ETFs, securities lending income has added between roughly 1 and 5 basis points to annual returns on average, depending on the market capitalization category.
The average return enhancement generated by securities lending income
Notes: This chart displays the asset-weighted average return enhancement provided by securities lending income in basis points across three market capitalization categories for the industry excluding Vanguard and for Vanguard U.S. equity index mutual funds and ETFs. The annual asset-weighted average return enhancement is calculated as the sum of the annual net securities lending income divided by the sum of the monthly average assets under management for each fund or ETF during its fiscal year. The calculation is made for all funds and ETFs in each category. Market capitalization categories are based on a fund’s Morningstar category assignment. The time period covers 12-month fiscal years from January 2019 through December 2022. Results will vary for other time periods.
Our sample includes funds and ETFs that belong to the Morningstar Category "U.S. Equity" and have been designated as "Index Funds" by Morningstar. Fund-year observations with missing datapoints for average fiscal-year assets under management, average value of portfolio securities on loan, or annual net securities lending income were excluded from the analysis.
Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at www.vanguard.com/performance.
Sources: Vanguard calculations using data from Morningstar.
Lending—prioritizing value over volume
Examining the lending income generated per dollar on loan demonstrates the benefit of Vanguard’s value-based approach. We focus on lending securities that are in short supply, which helps limit the portion of a portfolio on loan and, as a result, generates more lending income per dollar on loan than the industry.
Vanguard funds and ETFs have generated income of between roughly 400 and 500 basis points per dollar on loan on average.
Average income per dollar on loaned securities
Notes: This chart displays the asset-weighted average income per dollar on loan in basis points across three market capitalization categories for the industry excluding Vanguard and for Vanguard U.S. equity index mutual funds and ETFs. The annual asset-weighted average income per dollar on loan is calculated as the sum of the annual net securities lending income divided by the sum of the monthly average value of portfolio securities on loan for each fund or ETF during its fiscal year. The calculation is made for all funds and ETFs in each category. Market capitalization categories are based on a fund’s Morningstar category assignment. The time period covers 12-month fiscal years from January 2019 through December 2022.
Our sample includes funds and ETFs that belong to the Morningstar Category "U.S. Equity" and have been designated as "Index Funds" by Morningstar. Fund-year observations with missing datapoints for average fiscal-year assets under management, average value of portfolio securities on loan, or annual net securities lending income were excluded from the analysis.
Sources: Vanguard calculations using data from Morningstar.
Expense ratio offset
Securities lending income can help offset some of the effects of a fund’s expense ratio.
Vanguard funds and ETFs have offset a meaningful portion of their expense ratios—between 23% and 90% on average—which helps reduce the effective cost of fund ownership and give Vanguard investors the best chance for investment success.
Average portion of expense ratios offset by securities lending income
Notes: This chart displays the asset-weighted average percentage of a fund’s expense ratio that is offset by securities lending income across three market capitalization categories for the industry excluding Vanguard and for Vanguard U.S. equity index funds and ETFs. The annual asset-weighted average percentage of a fund’s expense ratio that is offset by securities lending income is calculated by dividing the sum of the annual net securities lending income by the sum of the fund/ETF’s annual expenses for its fiscal year. Expenses are calculated based on the average share-class-level assets and corresponding expense ratios for each share class of a given fund or ETF in a given fiscal year. The calculation is made for all funds and ETFs in each category. Market capitalization categories are based on each fund’s Morningstar category assignment. The time period covers 12-month fiscal years from January 2019 through December 2022.
While securities lending income can offset the effects of a fund’s expense ratio, this does not mean investor expenses are directly reduced. Comparing the net lending income to total expenses illustrates the effect that securities lending income can have on net investor returns.
Our sample includes funds and ETFs that belong to the Morningstar Category "U.S. Equity" and have been designated as "Index Funds" by Morningstar. Fund-year observations with missing datapoints for average fiscal-year assets under management, average value of portfolio securities on loan, or annual net securities lending income were excluded from the analysis.
Sources: Vanguard calculations using data from Morningstar.
Related links:
- A framework for considering cash in your portfolio (article, issued April 2024)
- The five factors that make up total ETF costs (article, issued March 2024)
- A client-centric approach to securities lending (article, issued October 2023)
Notes:
For more information about Vanguard funds and Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
All investing is subject to risk, including possible loss of the money you invest. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.
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