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"Earn passive income with your securities!" - Have you already seen this tempting offer from your broker? Sounds like a perfect deal, doesn't it? You already have ETFs and shares in your portfolio - why not take a little extra return with you?
But what looks like a clever financial hack at first glance actually harbours risks that are usually cleverly circumvented in the advertising promises. Find out in this article, what securities lending really meanswhich Hidden dangers and whether this deal is even worthwhile for you as a private investor.
To explain securities lending, imagine the following scenario:
You park your expensive car (your securities) in a garage. You pay the garage owner (your broker) a small fee for parking your car. The terms of use state that the garage owner may lend your car to other people for a fee when you are not using it - but many customers overlook this or do not fully understand it.
What exactly happens?
The hidden risk:
A "Black Swan" event happens - the borrower has a serious accident with your car and files for bankruptcy. At the same time, the market for scooters crashes and your "110% security" is suddenly only worth CHF 15,000. Your CHF 50,000 car is gone and you are left with a massive loss - for a paltry CHF 5 per month "additional income".
Securities lending works in practically the same way in the financial world:
The motivations behind the securities lending offers that you see more and more frequently are manifold:
With your broker you can Various models encounter:
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The main problem with securities lending that you should be aware of is its extremely unbalanced risk structure:
Let's illustrate this with concrete figures: With an ETF portfolio of CHF 10,000, you might earn CHF 10-50 per year - but in the worst-case scenario you risk a total loss of CHF 10,000. Asymmetric risk. You would never make a bet like that, would you?
The most important aspect that your broker's marketing brochures usually fail to mention: Lent securities lose their special asset protection!
What does this mean for you? Normally, your securities held with a broker are legally yours and are protected in the event of broker insolvency. However, if they are lent out, you only have a claim to their return - you become a normal creditor if something goes wrong. This legal difference can decide your assets in an emergency.
The most dangerous risk arises in the event of a systemic market collapse - a so-called "Black Swan" event:
Such scenarios are not just theoretical: the Lehman bankruptcy in 2008 and other financial crises have shown that supposedly impossible risks can become real - precisely when you are most dependent on the security of your investments.
Your broker probably advertises with a reassuring "Overfuse from 102-110%" - but this figure can be misleading and gives you a false sense of security:
Always remember that: No return without risk.
Even with daily Adjustments to collateral (known as "marking to market"), you are still exposed to considerable risks:
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The important details on securities lending can usually be found buried deep in the General Terms and Conditions. Pay particular attention to these typical formulations:
What is often missing in your contract documents or only in the Small print stands:
To give you a balanced picture, you should also consider the potential advantages know:
In certain situations, securities lending can therefore make sense for you - provided you are fully aware of the risks and have a correspondingly high risk appetite. Especially if you are already pursuing more speculative strategies with a small portion of your assets, the additional return could justify the risks you are taking.
Would you like to know, whether your broker lends your securities? This is the best way to proceed:
Pay particular attention to these suspicious clues:
You can find a detailed overview of various broker models in our Online broker comparison Switzerlandthat can help you make a decision.
Are you about to decide whether you should authorise securities lending? Use this practical checklist to make an informed decision:
✓ TransparencyHow openly and honestly does your broker communicate the risks?
✓ Income shareWhat percentage of the rental fees do you actually receive?
✓ Collateralisation ratioIs the overfuse at least 105-110%?
✓ Collateral qualityWhat kind of collateral is accepted? (Government bonds are better than corporate bonds)
✓ Control option: Can you flexibly exclude certain securities from the loan?
✓ Activation methodIs securities lending activated by default (opt-out) or do you have to actively agree (opt-in)?
✓ Asset shareHow much of your total assets are you exposing to this risk?
✓ Emergency planDoes your broker have a clear plan for crisis scenarios?
While we are mainly concerned with securities lending by brokers in this article, it is important to note that most ETFs themselves operate securities lending. Almost all major providers such as iShares (BlackRock), Vanguard, UBS or Xtrackers use this practice to slightly improve the performance of their funds.
The ETF However, securities lending differs from brokerage in important respects:
For investors who want to avoid securities lending completely, there are also "non-lending" ETFs. These completely dispense with this practice, but can sometimes have slightly higher total costs.
In practice, the Securities lending with established ETF providers This represents a manageable risk due to the strict regulations and security measures - significantly lower than securities lending via many brokers.
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As someone who deals with the financial markets on a daily basis and pursues a scientifically sound, long-term investment strategy, I am extremely critical of securities lending.
The crucial question you should ask yourself is: Is a measly additional yield of 0.1-0.5% per year worth the enormous potential risk?
For my main portfolio and my long-term investments, my answer is clear: No. The strong asymmetric risk profile is disproportionate to the minimum return. Particularly worth considering: In turbulent market phases - precisely when you want to rely on the value of your investments - securities lending could become a fatal problem.
Your personal risk assessment may be different for smaller "play money" deposits. Here you could argue that the additional return is worth the risk. But even then, you should be fully aware of the possible consequences.
My specific advice to you: Prioritise security over minimal improvements in returns. The solid foundation of any successful long-term investment strategy should be stability and reliability - the very qualities that securities lending potentially undermines.
What are your experiences with securities lending? Have you decided in favour or against it? Share your thoughts in the comments!
4 responses
Hello Eric
Thank you for the detailed article. What is also worth mentioning: According to a brief search, securities lending is activated by default with certain brokers (Degiro and Interactive Brokers), i.e. if you do not want this, you have to deactivate this option manually (opt-out).
With other brokers (Swissquote, Saxo), however, it must be consciously activated (opt-in).
Hello Eric
Most ETFs also do securities lending, would you also avoid them?
MFG Kili
Hello Kili,
That's a very good question! You raise an important point, because most large ETFs do in fact engage in securities lending themselves.
In the case of ETFs, however, securities lending differs from securities lending via brokers in a number of important respects:
Better hedging: ETF providers such as iShares, Vanguard or UBS typically require overcollateralisation of 102-110% of the value lent.
Limited shares: The major providers tend to lend only a controlled portion of their portfolio - for example, with Vanguard FTSE All-World it is often under 5%, with iShares Core ETFs it varies between 0.5-15%.
Income return: Unlike with many brokers, some of the income flows back into the ETF (with Vanguard even 100% after costs), which benefits all investors.
This practice is standard for almost all major ETF providers, not just for niche products. There are also special "non-lending" ETFs for investors who want to avoid securities lending altogether - although these are in the minority and sometimes somewhat more expensive.
Personally, I see securities lending with reputable ETF providers as less problematic than with brokers, as transparency is higher and security standards are stricter.
I have added a paragraph on ETF securities lending to the article.
Best regards
Eric
Ciao Eric
Thank you for your answer.
Gerd Kommer even sees some advantages with ETFs that do securities lending.
For the people who are interested, here is the link.
https://gerd-kommer.de/wertpapierleihe-bei-etfs/
Greetings
Kili