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On the Fidelity account page that displays my holdings online, I noticed banners saying I could make extra money by lending my securities. I ignored this on the premise of “too good to be true.” Then I got an email from Fidelity advertising their Fully Paid Lending Program and read what they had to say. By following a link, I was able to get an assessment of each of my accounts telling me which holdings might be eligible and how much they might yield.
The account assessments said I did have eligible securities, all of which were ETFs, and that I could earn interest by loaning them to others, apparently short sellers. The interest estimates ranged from 1% to 10% based on the loan market for each security. This interest rate is security specific and varies from time to time based on the market for each security. Interest accumulates during the month and is paid out after month end.
Still skeptical, I did an online search independent of Fidelity and found that other brokerages have substantially identical programs, including Vanguard, Schwab and Interactive Brokers. The primary caution I picked up from my online search was that tax favored qualified dividends paid on a security while it is on loan will be passed on to you, but it will be in the form of ordinary income not as a qualified dividend. Of course, this only matters in taxable accounts.
The security does not have SIPC insurance coverage while it is on loan. The program description explains that when a security is loaned out, Fidelity deposits an equivalent dollar amount into a bank account as collateral in the event the borrower fails to return the security. The collateral is adjusted periodically to account for changes in the market value of the loaned security.
I’m also relying on the reputational risk Fidelity would suffer if a client-lender lost money on this.
I enrolled my wife’s and my Roth IRA accounts as a test. I had to answer a few questions to qualify each of us for the program. Also, only accounts with a balance of $25,000 or more are eligible.
The pixels on my electronic signature were barely dry when an ETF we both own was loaned out. The interest was 8.88% and together we would receive $45 per day in interest. Counting my chickens before they hatched, I quickly calculated we’d realize $1350 per month. Not so. Both loans lasted one day. We made $45.
I now have 3 months experience. I have made fifteen loans and my wife has made six. I say “made,” but we do nothing… the security is just swept away and returns just as seamlessly. The loans have been for as little as one day while some have been as long as five days. Sometimes my entire position in an ETF is borrowed and other times it is just a partial position. The actual interest rate paid has ranged from 0.75% to 13% being a somewhat broader range than the initial assessment predicted.
To give a sense of the range, I had one loan of 39 shares of an ETF valued at $900 that lasted five days and yielded me 4 cents per day. The largest windfall was a four-day loan on a $128,000 position at 12% yielding $171.40.
The ETF position that has had the most activity is FENI (Fidelity Enhanced International ETF). We hold it in both accounts and together those two positions represent 96% of our 3 months of income payments with interest rates varying from 8.88% to 13%. The high interest rate and the frequency of the loans suggests that during this time period, there has been a big demand to borrow this ETF. I realize this could evaporate. As an example, I hold another ETF in my account that has never been borrowed… will there be demand for that in the future?
Our total additional income for three months for both accounts was just over $500, or just over $160 per month. This will cover several free lunches.
Clearly, this is not going to make me rich. On the plus side, I don’t have to do anything. And, since the interest is paid into our Roth accounts, I will never have to pay taxes on it.
Would this work for you? It depends on whether you have holdings that are desirable for lending and how big those positions are. This is where the assessment comes in.
This may be the closest I’ll get to an investment free lunch. What am I missing?
Thanks, Howard, for sharing your 3-month experience. My husband and I were wondering how it worked.
Howard, thanks for sharing this. Like Dan said I was aware of short sales. I thought the borrowed shares usually came from a brokerage firm’s inventory. I just looked and found that many brokerage firms use client’s margin accounts, with their permission, to loan shares.
Does Fidelity require a margin account for this program.
No margin account required to do this.
Howard, thanks for giving us the detail of your history with lending your ETFs. I know the mechanics of short sales, but never understood where the short sellers borrowed the securities from. Your post has been very educational.
Interesting. Never heard of that but I own funds not ETFs. Sounds like some people are day trading ETFs. Obvious question would be “what could go wrong”? Maybe nothing. One other question: what happens to any interest or dividends paid while the ETF is on loan?
You will receive a payment in lieu of any dividend paid while the security is loaned out. The difference is that it will be considered ordinary income for tax purposes rather than dividend income.