Most borrowers, typically institutional investors, would implement short positions with the shares, buy them back when the price dips and return the borrowed shares to the ETF at a profit.
ETF investors should note that securities lending is not something new or solely found in ETFs – institutional investors and funds have utilized the strategy more prolifically. Additionally, current regulations state that no more than one-third of a fund’s total assets can be loaned out, and ETFs have been more conservative in lending than other funds.
Moreover, some fund providers, like BlackRock, have stated that they will compensate funds and protect investors from financial loses if a company that borrows stocks goes bust, reports Emma Dunkley for Citywire.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.