Relying solely on the expense ratio of an exchange traded fund (ETF) to assess its total cost can be limiting. That’s why it is crucial for institutional investors to consider additional factors — like securities lending potential — when selecting the right ETF to trade.
Compared to other investment vehicles tracking the S&P 500® Index, the SPDR® S&P 500® ETF Trust (SPY) delivers a specific cost offset advantage through its unique lending market.
Securities lending, or the exercise of loaning securities to other investors, is a key aspect of capital markets activity that facilitates settlement, injects liquidity, and fosters confidence for risk taking. These benefits are accessible to all types of investors, spanning from long-term stable asset base investors to more active participants, like hedge funds or market makers.
ETF securities lending has grown alongside broader adoption of the structure. Many investors may be familiar with “inside” lending, or the practice in which ETF issuers lend out the constituents of the ETF. “Outside” lending, however, refers to when ETF beneficial owners make their ETF shares available for borrowing.
In some cases, “outside” lending can serve as a more relevant driver of returns, with the potential to earn lending returns that offset the fees of the fund.
At the forefront of most ETF capital markets activity stands SPY, the world’s largest and most actively traded ETF.2 For SPY, securities lending is an important contributor to the overall efficiency of secondary market trading.
Through the first half of 2023, SPY represented an estimated average of 94% of S&P 500 ETF notional short interest and 27% of total ETF notional short interest from among 3,100 US-listed funds.3
Most importantly, SPY’s $35B in average daily secondary value traded accounted for more than 19% of all ETF trading in the first half of 2023.4 As different users meet on the exchange, centralized pools of liquidity form, benefitting all users of SPY. And as different investors access SPY’s liquidity, demand to borrow SPY shares ebbs and flows with market dynamics across use cases.
Borrowers of SPY are typically hedge fund managers, investment managers, options traders, or market makers who seek to:
But what are the two most notable and persistent drivers of this supply and demand?
When evaluating the potential yield generated from securities lending, we can look at the volume-weighted average fee (VWAF) and the utilization rate percentage:
To demonstrate the potential return on shares made available, we can multiply the VWAF by the utilization rate to determine the historical return on lendable assets:
|Ticker||Fund Name||Trailing 1-Year Average|
|VWAF bps||Utilization Rate %||Gross Return on Lendable Assets (bps)|
|SPY||SPDR S&P 500 ETF||12||41%||5.1|
|IVV||iShares Core S&P 500 ETF||10||2%||0.2|
|VOO||Vanguard S&P 500 ETF||10||6%||0.7|
Source: Markit IHS as of September 13, 2023; Estimates are for illustrative purposes only and do not include additional return factors such as agency lending fees, reinvestment rates, or other considerations. Past performance is not a reliable indicator of future performance.
Relative to its peers,7 SPY’s historical return on lendable assets reflects how the fund’s broader user base supports consistent demand. And, it underscores how vital it is for institutional investors to look beyond a fund’s expense ratio to consider factors like securities lending potential and transaction costs when selecting the right S&P 500® ETF.
Through strong relationships with authorized participants, market makers, liquidity providers, execution trading desks/platforms, and stock exchanges, the SPDR SEI team plays an active role in supporting competitive markets and maintaining the SPDR ETF liquidity ecosystem.
The team’s insight into primary and secondary market activity — as well as access to numerous proprietary pre-trade liquidity analytics tools — can help you to evaluate execution strategies and meet your objectives, even in uncertain markets.
Connect with them to learn more about the lending potential of SPY or to request the team’s help.
1 Bloomberg Finance L.P., as of June 30, 2023.
2 Bloomberg Finance L.P., as of June 30, 2023.
3 Bloomberg Finance L.P., as of June 30, 2023.
4 Bloomberg Finance L.P., as of June 30, 2023.
5 Bloomberg Finance L.P., as of June 30, 2023.
6 Bloomberg Finance L.P., as of June 30, 2023.
7 No representation or warranty is being made to the currency, accuracy, reliability, or completeness of the information nor liability for any decisions made based upon it. Past performance is not a reliable indicator future performance. Any index information or performance is meant to not meant to represent any specific fund. You cannot invest directly in an index. Additional information on the funds discussed, including standard performance and the prospectus, are available at:
The ability to quickly buy or sell an investment in the market without impacting its price. Trading volume is a primary determinant of liquidity.
The market in which ETF shares or common shares of public companies that currently exist are traded on exchanges between investors.
The loaning of stocks, derivatives or other securities to investors, often short sellers. Securities lending requires the borrower to put up collateral, whether cash, security or a letter of credit. When a security is loaned, the title and the ownership are also transferred to the borrower. Short selling is a common practice for fund managers, who use profits from securities lending to defray costs of running a fund, helping to lower expense ratios for investors.
Total Cost of Ownership (TCO)
The purchase price of an asset plus the costs of operation.
The tendency of a market index or security to jump around in price. Volatility is typically expressed as the annualized standard deviation of returns. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to higher potential losses.
Securities lending programs and the subsequent reinvestment of the posted collateral are subject to a number of risks, including the risk that the value of the investments held in the collateral may decline in value and may at any point be worth less than the original cost of that investment.
Securities lending is not without risks, and investors should fully understand the risks involved before participating. Risks include the potential for the lender to suffer a financial loss if: 1) the borrower becomes insolvent, or 2) the value of the collateral becomes less than the cost of buying back the securities that have been lent.
This communication is not intended to promote or recommend the use of options or options trading strategies and should not be relied upon as such.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
Hedging involves taking offsetting positions intended to reduce the volatility of an asset. If the hedging position behaves differently than expected, the volatility of the strategy as a whole may increase and even exceed the volatility of the asset being hedged.
Investing in futures is highly risky. Futures positions are considered highly leveraged because the initial margins are significantly smaller than the cash value of the contracts. The smaller the value of the margin in comparison to the cash values of the futures contract, the higher the leverage. There are a number of risks associated with futures investing including but not limited to counterparty credit risk, basis risk, currency risk, derivatives risk, foreign issuer exposure risk, sector concentration risk, leveraging and liquidity risks.
There can be no assurance that a liquid market will be maintained for ETF shares.
Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.
Past performance is not a reliable indicator of future performance.
In general, ETFs can be expected to move up or down in value with the value of the applicable index. Although ETF shares may be bought and sold on the exchange through any brokerage account, ETF shares are not individually redeemable from the Fund. Investors may acquire ETFs and tender them for redemption through the Fund in Creation Unit Aggregations only. Please see the prospectus for more details.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.
While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Investing involves risk including the risk of loss of principal.
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The views expressed in this material are the views of the SPDR SEI team through the period ended September 15, 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
The funds presented herein have different investment objectives, costs and expenses. Each fund is managed by a different investment firm, and the performance of each fund will necessarily depend on the ability of their respective managers to select portfolio investments. These differences, among others, may result in significant disparity in the funds' portfolio assets and performance. For further information on the funds, please review their respective prospectuses.
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