Securities lending is a long-held practice whereby ETFs make loans of stocks or bonds to seek an incremental increase in returns for fund shareholders. While not without risk, securities lending seeks to benefit ETF shareholders.
To understand securities lending, let’s start with the basics of understanding how it works. First, a large financial institution asks to borrow a stock or bond from an ETF. In order to borrow the stock or bond, the financial institution will negotiate financial terms with the lending agent of the ETF and provide collateral. The ETF keeps the collateral to secure repayment in case the borrower fails to return the loaned stock or bond. The value of the collateral is required to be at least equal to the market value of the loaned stock or bond and usually even more than the value. The financial institution typically uses the stock or bond to hedge against market risks, facilitate a short sale, or to use as collateral in another transaction.
• A large financial institution asks to borrow a stock or bond from an ETF, and in return the ETF asks for collateral to secure the loan
• Once the collateral is received, the ETF lends the stock or bond to the financial institution
• The ETF invests cash collateral in a money market fund to seek incremental return
• If the security pays a dividend or other distribution while on loan, the borrower will pay the ETF what the ETF would have received if it had been holding such security
• Either at the request of the ETF company, or at the end of the loan term, the borrower must return the security back to the ETF
• ETF company then releases the collateral back to the borrower to close out the process
How do ETF investors benefit from securities lending?
ETF investors can benefit from securities lending in the form of performance. This is possible because the ETF can generate additional income through the rate that it charges for lending securities and/or income on the reinvestment of the collateral that the borrower provides in exchange for the loan. Cambria likes to look at this as hidden yield.
How is securities lending regulated?
Securities lending is a well-established activity and is subject to regulation. The U.S. Securities and Exchange Commission (SEC) is the primary regulator of securities lending activities for ETFs. SEC rules and guidance govern who can borrow or lend, what types of collateral are acceptable, the levels of collateral, and the reasons for which securities can be borrowed.
What are the primary risks associated with securities lending?
Overall, the primary risks for securities lending are:
Borrower Default Risk
Securities lending involves the risk that the borrower may default, including by failing to return the securities in a timely manner, or at all. In order to minimize the risk of the borrower default, each borrower is assessed by Cambria and monitored over time. Cambria will conduct regular borrower reviews. New transactions are systematically prevented if a borrower reaches internal limits.
As an additional safeguard, Cambria provides an indemnity for its ETFs for a shortfall in collateral in the event of a borrower default. If a shortfall were to exist between the collateral amount received that the cost to repurchase a loaned security and that shortfall is not due to reinvestment risk, Cambria would reimburse the fund in full.
Collateral Re-Investment Risk
When an ETF receives cash as collateral, it may be reinvested in a money market fund with the objective of preserving principal and liquidity while generating income.
This re-investment of cash collateral exposes the fund to various investment risks and potential loss of principal. These risks include market, liquidity and credit risks, and are not covered by Cambria’s borrower default indemnity. Market risk the potential for losses due to changing prices. Liquidity risk is the possibility that securities or instruments in which the cash is invested become difficult to sell or can only be sold at discounted prices. Credit risk is the potential that securities or instruments in which the cash is invested default or sell at discounted prices due to changes in credit quality.
Disclosure:
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the Fund’s full and summary prospectus which may be obtained by calling 855-383-4636 (ETF INFO) or visiting our website at www.cambriafunds.com. Read prospectus carefully before investing or sending money.
The Cambria ETFs are distributed by ALPS Distributors Inc., 1290 Broadway, Suite 1000, Denver, CO 80203, which is not affiliated with Cambria Investment Management, LP, the Investment Adviser for the Fund.ETFs are subject to commission costs each time a “buy” or “sell” is executed. Depending on the amount of trading activity, the low costs of ETFs may be outweighed by commissions and related trading costs. Shares are bought and sold at market price (closing price) not net asset value (NAV) are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. Buying and selling shares will result in brokerage commissions. Brokerage commissions will reduce returns.Not FDIC Insured. May Lose Value. Not Bank Guaranteed.
Securities Lending
Cambria
Securities lending is a long-held practice whereby ETFs make loans of stocks or bonds to seek an incremental increase in returns for fund shareholders. While not without risk, securities lending seeks to benefit ETF shareholders.
To understand securities lending, let’s start with the basics of understanding how it works. First, a large financial institution asks to borrow a stock or bond from an ETF. In order to borrow the stock or bond, the financial institution will negotiate financial terms with the lending agent of the ETF and provide collateral. The ETF keeps the collateral to secure repayment in case the borrower fails to return the loaned stock or bond. The value of the collateral is required to be at least equal to the market value of the loaned stock or bond and usually even more than the value. The financial institution typically uses the stock or bond to hedge against market risks, facilitate a short sale, or to use as collateral in another transaction.
• Once the collateral is received, the ETF lends the stock or bond to the
financial institution
incremental return
• If the security pays a dividend or other distribution while on loan, the
borrower will pay the ETF what the ETF would have received if it had
been holding such security
the borrower must return the security back to the ETF
• ETF company then releases the collateral back to the borrower to close
out the process
How do ETF investors benefit from securities lending?
ETF investors can benefit from securities lending in the form of performance. This is possible because the ETF can generate additional income through the rate that it charges for lending securities and/or income on the reinvestment of the collateral that the borrower provides in exchange for the loan. Cambria likes to look at this as hidden yield.
How is securities lending regulated?
Securities lending is a well-established activity and is subject to regulation. The U.S. Securities and Exchange Commission (SEC) is the primary regulator of securities lending activities for ETFs. SEC rules and guidance govern who can borrow or lend, what types of collateral are acceptable, the levels of collateral, and the reasons for which securities can be borrowed.
What are the primary risks associated with securities lending?
Overall, the primary risks for securities lending are:
Borrower Default Risk
Securities lending involves the risk that the borrower may default, including by failing to return the securities in a timely manner, or at all. In order to minimize the risk of the borrower default, each borrower is assessed by Cambria and monitored over time. Cambria will conduct regular borrower reviews. New transactions are systematically prevented if a borrower reaches internal limits.
As an additional safeguard, Cambria provides an indemnity for its ETFs for a shortfall in collateral in the event of a borrower default. If a shortfall were to exist between the collateral amount received that the cost to repurchase a loaned security and that shortfall is not due to reinvestment risk, Cambria would reimburse the fund in full.
Collateral Re-Investment Risk
When an ETF receives cash as collateral, it may be reinvested in a money market fund with the objective of preserving principal and liquidity while generating income.
This re-investment of cash collateral exposes the fund to various investment risks and potential loss of principal. These risks include market, liquidity and credit risks, and are not covered by Cambria’s borrower default indemnity. Market risk the potential for losses due to changing prices. Liquidity risk is the possibility that securities or instruments in which the cash is invested become difficult to sell or can only be sold at discounted prices. Credit risk is the potential that securities or instruments in which the cash is invested default or sell at discounted prices due to changes in credit quality.
Disclosure:
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the Fund’s full and summary prospectus which may be obtained by calling 855-383-4636 (ETF INFO) or visiting our website at www.cambriafunds.com. Read prospectus carefully before investing or sending money.
The Cambria ETFs are distributed by ALPS Distributors Inc., 1290 Broadway, Suite 1000, Denver, CO 80203, which is not affiliated with Cambria Investment Management, LP, the Investment Adviser for the Fund.ETFs are subject to commission costs each time a “buy” or “sell” is executed. Depending on the amount of trading activity, the low costs of ETFs may be outweighed by commissions and related trading costs. Shares are bought and sold at market price (closing price) not net asset value (NAV) are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. Buying and selling shares will result in brokerage commissions. Brokerage commissions will reduce returns.Not FDIC Insured. May Lose Value. Not Bank Guaranteed.