Securities lending

A fund lending holdings to other market participants for a fee, usually against collateral, generating income the holdings themselves did not produce.

Example

A fund charging 0.20% that finished only 12 basis points behind its index had recovered roughly 8 basis points from somewhere, most often from lending.

Important

The income is real and it carries exposure to the borrower and to the collateral arrangements. A tracking difference smaller than the fee is a prompt to read the annual report, not simply good news - and the manager usually keeps a share of the fee.

Related terms

  • Tracking difference — How far a fund's return finished behind, or ahead of, the index it tracks over a stated period.
  • Expense ratio — The annual fee a fund charges, expressed as a percentage of the money you have in it.
  • Credit risk — The risk that an issuer fails to make a contracted payment. It is the risk most associated with bonds and, for high-quality issuers, rarely the one that moves the price.
  • Index fund — A fund built to track a market index, such as a broad stock index, rather than to beat it.

Lessons that explain it

  • The fund manufactures nothing: pass-through, minus costs — A fund's return is the weighted return of its holdings less what it charges. Knowing that changes what you are actually forecasting when you forecast a fund. (11 min)
  • Appraising one fund: the holdings file, the rules, and the gap to the index — Seven checks, in order of how much they change what you own. The two everybody runs - the name and the expense ratio - are the two cheapest, and the one nobody runs is where the exposure lives. (14 min)

All 578 terms in the Investing glossary