Securities lending is the practice whereby mutual funds and exchange-traded funds (ETFs) lend out their securities to short sellers. I have voiced some concerns about this practice before in previous blog postsand columns.
In short, many mutual funds and ETFs:
keep all, or some part, of the lending fees lend against collateral of lower quality than government bonds (raising risk) subjecttheir securities to downward price pressures (by aiding short selling).
Such practices would not raise questions if the funds owned the securities. But they dont: the securities are owned by the unitholders. The funds just hold themin trust for their unitholders.
Not all mutual funds and ETFs lend out their securities. Those set up as Unit Investment Trusts are restricted from this practice. They include four of the oldest and biggest ETFs:
SPDR S&P 500 (Symbol: SPY) SPDR Dow Jones Industrial Average ( DIA) (formerly Diamonds Trust) PowerShares QQQ Trust Series ( QQQQ) SPDR S&P MidCap 400 ( MDY)
Hat tip to http://42word.donheckerlawyer.com/