In theory, Vanguard could even pay investors to invest in the firm, creating negative expense ratios, Blake said.
Nizam Hamid, an independent ETF consultant, in the Ignites Europe report said that revenue from securities lending can indeed help offset fees.
Yet he added there are “very few funds where you will get enough securities lending revenues” to completely offset the ETF fees. “It can happen in odd and exceptional cases, but it is quite hard to suggest it could be a strong ongoing theme,” Hamid said in the article.
Regulators have been taking a closer look at ETF securities lending practices in Europe. The European Securities and Market Authority has proposed more rigorous guidelines on collateral. [European Regulators Focus on Securities Lending in ETFs]
“It’s a pipe dream,” said Ben Seager-Scott, senior research analyst at BestInvest, referring to the idea of no-fee ETFs.
“Encouraging firms to do more [securities lending]is not very wise [as]lending out more of an ETF effectively turns physically replicated ETFs into synthetic ETFs,” he said in the Ignites Europe story. “It’s a nice idea, but the reality is that people want to invest in very liquid [products], and there is not enough demand for securities lending that it would be feasible” to bring expense ratios down to zero.
The original version of this story has been updated.