A recent lawsuit against iShares has raised a lot of concerns from investors. Specifically, several pension funds are suing iShares and alleging that the company took excessive profits from securities lending.
The suit claims that iShares made $397 million in securities lending fees in 2011 and $157 throughout 2011, keeping 40% of those profits for itself.
Securities lending plays a big role in the performance of ETFs, and typically, ETF investors would expect to get the returns of an index minus the expense ratio. Althought securities lending can be profitable for both shareholders and issuers, it adds another element of risk to owning an ETF. If a borrower is unable to return the shares, for whatever reason, the ETF would be on the hook for any losses associated with the borrowed stock. Though highly unlikely, such a situation is seen as possible.
According to Matt Reiner, “It’d take a black swan-type event…We take it into consideration, but we haven’t made any decisions based solely on securities lending.”
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