But according to an article published last year in Portfolio.com, State Street, the world’s second largest ETF issuer, only retains 15 percent of its US ETFs’ lending revenues, while Vanguard apparently returns nearly all securities lending revenues, after costs, to investors.
And while State Street takes a 15 percent cut of its ETFs’ revenues from lending stocks in the US, the firm charges its ETF investors over three times more in Europe for doing the same thing—50 percent. Why the difference?
Unfortunately, having a majority of independent fund board directors doesn’t guarantee that things can’t go wrong. The legal provisions in the US fund rules that enshrine this requirement didn’t prevent the mutual fund timing scandal of 2003, one commentator on fund governance has pointed out.
Meanwhile, in Europe there’s a very wide variety of fund structures, with no regulatory requirement at all to have independents at board level, said Douglas Ferrans, our interviewee last week and chairman of the UK’s equivalent to the ICI, the Investment Management Association. There are clear governance weaknesses in some European fund jurisdictions, the IMA believes.
Given the scale of earnings that can be made over and above ETF management fees, it’s clear that there are plenty of reasons for fund boards to be looking closely at issuers’ practices when it comes to share lending, charges for derivatives and the security and quality of collateral provisions.
And some standardisation of exchange-traded fund practices in these “ancillary” fee-earning areas seems long overdue. If the ETF industry can’t come up with its own rules, it looks increasingly likely that regulators will impose some.