Skip to main content
SpringerLink
Log in

Securities Lending Activities in Mutual Funds and ETFs: Ethical Considerations

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

Securities lending has been a lucrative business for mutual funds and exchange-traded funds (ETFs) over the past decade. Unfortunately for investors, the sponsors of these funds have not been very transparent with the details of their securities lending programs, and consequently most investors in these funds are unaware of their exposure to the risks inherent in securities lending. Interestingly, most funds do not return the full profits from securities lending activities to their investors. In this paper, we examine and discuss the ethical considerations related to the securities lending activities of mutual funds and ETFs and offer a series of best practices that we believe will provide better transparency of these activities to fund investors.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Short selling, or shorting, is the process of borrowing securities from one party (the lender) and immediately selling them to another party. The objective is to earn a profit by later repurchasing the borrowed securities at a lower price and returning them to the lender.

  2. Securities Lending: Still No Free Lunch. Publication by Vanguard, July 2011.

  3. See BlackRock Securities Lending: Unlocking the Potential of Portfolios, June 2014.

  4. See Bank of England’s Quarterly Bulletin, 2011 third quarter report p. 224–233.

  5. For actively managed mutual funds, when a fund underperforms its benchmark, it is referred to as underperformance. For passively managed index mutual funds and ETFs, such underperformance is referred to as tracking error since the index fund/ETF is supposedly just passively invested in a benchmark and not being actively managed.

  6. An index change occurs when a company is deleted from a stock index and another company is added. Index changes to indices such as the S&P 500 occur for numerous reasons, including but not limited to an index company being acquired, going bankrupt, or no longer meeting index requirements (e.g., minimum market capitalization).

  7. Securities Lending Best Practices, 2012 report by eSEC Lending.

  8. Practical Guidance for Fund Directors on the Oversight of Securities Lending (May 2012), by the Mutual Fund Directors Forum.

  9. The Code of Ethics and Standards of Professional Conduct can be viewed at http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n6.1.

References

  • Bioy, H., & G. Rose. (2012). Securities lending in physical replication ETFs: A review of providers’ practices. Morningstar ETF Research, pp. 1–33.

  • Chen, H., Noronha, G., & Singal, V. (2006). Index changes and losses to index fund investors. Financial Analysts Journal, 62, 31–47.

    Article  Google Scholar 

  • Chiang, W. (1998). Optimizing Performance. In A. Neubert (Ed.), Indexing for maximum investment results. Chicago: GPCo Publishers.

    Google Scholar 

  • Christoffersen, S., Geczy, C., Musto, D., & Reed, A. (2007). Vote trading and information aggregation. Journal of Finance, 62, 2897–2929.

    Article  Google Scholar 

  • Dunham, L., & T. Simpson. (2014). An analysis of the impact of securities lending on the performance of ETFs, Working paper.

  • Dunham, L., & Simpson, T. (2010). Do index fund managers trade opportunistically around index changes? An empirical examination of S&P 500 index funds. Journal of Index Investing, 1, 58–64.

    Article  Google Scholar 

  • Dunham, L., & Simpson, T. (2012). The impact of securities lending on index fund performance. Journal of Investing, 21, 9–16.

    Article  Google Scholar 

  • Edelen, R. (1999). Investor flows and the assessed performance of open-end mutual funds. Journal of Financial Economics, 53, 439–466.

    Article  Google Scholar 

  • Frino, A., & Gallagher, D. (2001). Tracking S&P 500 index funds. Journal of Portfolio Management, 28, 44–55.

    Article  Google Scholar 

  • Kohlberg, L., Levine, C., & Hewer, A. (1983). Moral stages: A current formulation and a response to critics. In J. A. Meacham (Ed.), Contributions to human development (Vol. 10). New York: Karger.

    Google Scholar 

  • Kostovetsky, L. (2003). Index mutual funds and exchange-traded funds. Journal of Portfolio Management, 29, 80–92.

    Article  Google Scholar 

  • Lauricella, T. (2007). SEC discovers breaches in lending securities. Wall Street Journal, January 29.

  • Moser, S., Van Ness, B., & Van Ness, R. (2013). Securities lending around proxies: Is the increase in lending due to proxy abuse or a result of dividends? Journal of Financial Research, 36, 1–17.

    Article  Google Scholar 

  • Oberlechner, T. (2007). The psychology of ethics in the finance and investment industry. Research Foundation of CFA Institute, Charlottesville

  • Zweig, J. (2009). Is your fund pawning shares at your expense? Wall Street Journal.

Download references

Author information

Authors and Affiliations

  1. Department of Finance and Economics, College of Business, Creighton University, 2500 California Plaza, Omaha, NE, 68178, USA

    Lee M. Dunham, Randy Jorgensen & Ken Washer

Authors
  1. Lee M. Dunham
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Randy Jorgensen
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ken Washer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Lee M. Dunham.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Dunham, L.M., Jorgensen, R. & Washer, K. Securities Lending Activities in Mutual Funds and ETFs: Ethical Considerations. J Bus Ethics 139, 21–28 (2016). https://doi.org/10.1007/s10551-015-2609-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-015-2609-1

Keywords

JEL Classification

Search

Navigation