Asset management has long been a simple, fee-for-service business. Recently, however, exchange-traded funds (ETFs) have become increasingly engaged in two- sided markets between investors and stock borrowers. We show that ETF fees from lending securities match expense ratios on average and, in some cases, are much higher. We also show that managers tend to slant their holdings toward stocks with higher lending fees. Finally, we test for two-sidedness by showing that the ratio of lending fees to expense ratio drives asset growth. The results should be important to investors, who are no longer the customer buying service but are the product being sold.
- To be presented at the Northern Finance Association meetings, Mont Tremblant, Quebec, September 2016.
- Presented at the Western Finance Association meetings, Park City, UT, June 20-23, 2016.
- Presented at the Financial Intermediation Research Society (FIRS) Conference in Lisbon, Portugal June 1-3, 2016.
- Presented at Academic and Practitioner Conference on Mutual Funds and ETFs, University of Virginia, October 2015.
- Presented at Auckland Centre for Financial Research Meeting, Auckland University of Technology, December 2014.
- Media: NASDAQ, Fox Business.
- Formerly called “Passive Investing: The role of securities lending.”
- We are grateful for comments and suggestions by Adam Reed, Matt Ringgenberg, Melissa Prado, Chester Spatt, James Rowley, Roger Edelen, Sean Collins, Ned Cataldo, Jack Fonss, Gary Gastineau, and Chris Jaynes as well as the seminar participants at Vanderbilt University and the University of Delaware.