Securities lending, in the institutional world -- mutual funds, pension plans, etc. -- is as old as the proverbial hills. Of course there's risk, as with any financial instrument, but even a vanilla trade you make can fail and you'd never know it. I agree that firms like Fidelity, Schwab, and Vanguard are going to do their best to not leave their customers 'high and dry' in the event that the borrowed securities are not returned, so, personally, I see the risk as minimal.
Mutual funds are not eligible for lending, for a variety of reasons that I won't bore the audience with. Also, common broad index ETFs like VOO, IVV, etc. would be of no interest to speculators because they can be far more efficient, especially on the short side, in the futures markets.
Going back to my original point, you can look at the financials for your favorite mutual fund or ETF. You will almost always see a line item like "Securities Lending Income" in the Investment Income section of the Statement of Operations. This income generally is used to offset some portion of the fund's fees, so that the end yield to the fund investor is higher than it would have been.
I also agree that it's not a great idea to do this in taxable accounts because your dividends could be converted from QDI to ordinary income, similar to what has historically also been the case with securities loaned from margin accounts. What's new here is that you can receive the income, whereas historically the brokerage firms kept the proceeds from the securities loans.
We have 0 withheld. I calculate and make quarterly estimated payments based on our income for each period via IRS.gov, taken directly from our checking account via ACH. No forms, no muss, no fuss.
In addition to EFTPS (as referenced by Harry C. below), you can just go to IRS.gov, click on 'Make a Payment', and follow the instructions to validate yourself and make payments via ACH.
Just say NO to checks, which can be stolen, misdelivered, lost, etc. It's not worth the anxiety to get a small float.
No offense intended, but allowing the IRS to do cash flow and budget management strikes me as one of the least desirable outcomes for financial planning. It's not that hard to track income and use the prior year's TurboTax or other software to do a pro forma for the current year to keep abreast of current year tax liabilities.
This year we owe the IRS a lot (due to large Q4 Roth conversions), and I'm thrilled to have paid in advance (mostly Q4 estimated tax) only enough to satisfy the 110% safe harbor. The IRS will get the rest on April 12th, and I'm earning 4+% on that money in the interim.
To each his own, I guess.
While I completely agree with the author's sentiment regarding use of an appropriate benchmark, and have significant professional experience in this regard, I would caution against using Morningstar as the 'holy grail'.
Morningstar's assignment of a style benchmark is based on its assignment of a category. Sometimes it's hard to accurately pin down the right category, and sometimes, IMHO, Morningstar is just plain incorrect.
Case in point -- VEXAX, Vanguard's Extended Market Index fund. M* has had this assigned to MidCap Blend for at least 10 years, so the style benchmark is US MidCap Total Return. The issue is that the fund is over 60% Small + Micro, 32% Mid, 4.5% Large, whereas the benchmark is 94% Mid, 5% Large and 1% Small. The 5Y factor profile supports that this should be considered a SmallCap fund. This also calls into question the validity of the peer comparison data for this fund, and as a derivative, the Star rating.
False Comparisons, indeed!
Peter Lynch said it best.
"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."I used to get entertainment from the semi-annual surveys of economists conducted by the WSJ, but eventually got bored because the results were so predictably wrong.
Rick,
I'm not sure this "...capital asset—broadly defined as non-financial property..." is correct the way it's worded.Tax topic 409 literally says "Almost everything you own and use for personal or investment purposes is a capital asset."Perhaps you meant something like, 'in addition to financial assets', since most would know that investments are capital assets, with gains/losses reported on Schedule D and Form 8949.
PRWCX -- David Giroux's track record is unbelievable. M* has it as a Moderate Allocation fund, i.e. 50-70% Equity, which is accurate. Not only is it top 1% 5/10/15Y, the 'worst' calendar year in the last 10 it was 29th, and 1 of only 2 in the last 10 years where it wasn't top quartile. 2022, down less than 12%. Closed to new investors, but not tiny @ 48 billion AUM.
For those unfamiliar with M*, 1 is best, 100 is worst.
Yes the IRA distribution (whether or not converted to a Roth) raises the MAGI as it is ordinary income, but no the IRA distribution is not subject to the NIIT. It would only be actual investment income that would be subject to the NIIT to the extent tha the 250K threshold is breached.
Comments
Securities lending, in the institutional world -- mutual funds, pension plans, etc. -- is as old as the proverbial hills. Of course there's risk, as with any financial instrument, but even a vanilla trade you make can fail and you'd never know it. I agree that firms like Fidelity, Schwab, and Vanguard are going to do their best to not leave their customers 'high and dry' in the event that the borrowed securities are not returned, so, personally, I see the risk as minimal. Mutual funds are not eligible for lending, for a variety of reasons that I won't bore the audience with. Also, common broad index ETFs like VOO, IVV, etc. would be of no interest to speculators because they can be far more efficient, especially on the short side, in the futures markets. Going back to my original point, you can look at the financials for your favorite mutual fund or ETF. You will almost always see a line item like "Securities Lending Income" in the Investment Income section of the Statement of Operations. This income generally is used to offset some portion of the fund's fees, so that the end yield to the fund investor is higher than it would have been. I also agree that it's not a great idea to do this in taxable accounts because your dividends could be converted from QDI to ordinary income, similar to what has historically also been the case with securities loaned from margin accounts. What's new here is that you can receive the income, whereas historically the brokerage firms kept the proceeds from the securities loans.
Post: Free Lunch?
Link to comment from October 4, 2025
We have 0 withheld. I calculate and make quarterly estimated payments based on our income for each period via IRS.gov, taken directly from our checking account via ACH. No forms, no muss, no fuss.
Post: Easy Does It
Link to comment from February 22, 2025
In addition to EFTPS (as referenced by Harry C. below), you can just go to IRS.gov, click on 'Make a Payment', and follow the instructions to validate yourself and make payments via ACH. Just say NO to checks, which can be stolen, misdelivered, lost, etc. It's not worth the anxiety to get a small float.
Post: Easy Does It
Link to comment from February 22, 2025
No offense intended, but allowing the IRS to do cash flow and budget management strikes me as one of the least desirable outcomes for financial planning. It's not that hard to track income and use the prior year's TurboTax or other software to do a pro forma for the current year to keep abreast of current year tax liabilities. This year we owe the IRS a lot (due to large Q4 Roth conversions), and I'm thrilled to have paid in advance (mostly Q4 estimated tax) only enough to satisfy the 110% safe harbor. The IRS will get the rest on April 12th, and I'm earning 4+% on that money in the interim. To each his own, I guess.
Post: Easy Does It
Link to comment from February 22, 2025
While I completely agree with the author's sentiment regarding use of an appropriate benchmark, and have significant professional experience in this regard, I would caution against using Morningstar as the 'holy grail'. Morningstar's assignment of a style benchmark is based on its assignment of a category. Sometimes it's hard to accurately pin down the right category, and sometimes, IMHO, Morningstar is just plain incorrect. Case in point -- VEXAX, Vanguard's Extended Market Index fund. M* has had this assigned to MidCap Blend for at least 10 years, so the style benchmark is US MidCap Total Return. The issue is that the fund is over 60% Small + Micro, 32% Mid, 4.5% Large, whereas the benchmark is 94% Mid, 5% Large and 1% Small. The 5Y factor profile supports that this should be considered a SmallCap fund. This also calls into question the validity of the peer comparison data for this fund, and as a derivative, the Star rating. False Comparisons, indeed!
Post: False Comparisons
Link to comment from September 14, 2024
Peter Lynch said it best. "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." I used to get entertainment from the semi-annual surveys of economists conducted by the WSJ, but eventually got bored because the results were so predictably wrong.
Post: Ignore the Rule
Link to comment from August 17, 2024
Rick, I'm not sure this "...capital asset—broadly defined as non-financial property..." is correct the way it's worded. Tax topic 409 literally says "Almost everything you own and use for personal or investment purposes is a capital asset." Perhaps you meant something like, 'in addition to financial assets', since most would know that investments are capital assets, with gains/losses reported on Schedule D and Form 8949.
Post: Taxing Pastimes
Link to comment from April 12, 2023
PRWCX -- David Giroux's track record is unbelievable. M* has it as a Moderate Allocation fund, i.e. 50-70% Equity, which is accurate. Not only is it top 1% 5/10/15Y, the 'worst' calendar year in the last 10 it was 29th, and 1 of only 2 in the last 10 years where it wasn't top quartile. 2022, down less than 12%. Closed to new investors, but not tiny @ 48 billion AUM. For those unfamiliar with M*, 1 is best, 100 is worst.
Post: What’s your favorite actively managed fund—if any?
Link to comment from February 18, 2023
Yes the IRA distribution (whether or not converted to a Roth) raises the MAGI as it is ordinary income, but no the IRA distribution is not subject to the NIIT. It would only be actual investment income that would be subject to the NIIT to the extent tha the 250K threshold is breached.
Post: Self-Inflicted
Link to comment from July 9, 2022