Securities lending

A fund that simply holds an index has an asset nobody talks about: the holdings themselves are in demand. Short sellers need to borrow shares before they can sell them, and they pay for the privilege. Index funds are natural lenders — they hold everything, they trade rarely, and every basis point of lending income improves the return their investors actually receive.

This is one of the quiet reasons the tracking difference of a well-run fund can undercut its TER. The fee is charged as promised; the lending income claws part of it back inside the fund.

The risk is real but managed. The borrower posts collateral, marked to market; if the borrower fails, the fund liquidates the collateral and rebuys the securities. The questions worth asking of any fund are how much of the portfolio may be on loan at once, what collateral is accepted, and how the lending revenue is split between the fund and the management company — that split varies, and it is disclosed in the fund documents. A fund keeping most of the revenue for its investors is treating lending as a service; one keeping most for itself is treating it as a second fee stream.