Pension funds miss out on ETF lending

Pension funds are missing out on the benefits of using ETFs within their securities lending programmes, industry experts say.

Speaking at Data Explorer's Securities Financing Forum, BlackRock director Keshava Shastry says pension funds are often not aware they can lend ETFs and therefore "a lot of revenue is left on the table".

ETFs can also be used as collateral in equities lending transactions.

eSecLending head of global securities financing Chris Poikonen says in this case a pension fund could improve its position, provided that it is a highly liquid ETF with appropriate over-collateralization.

This is particularly the case where certain ETFs can provide more diversification than a given basket of equities or corporate bonds as collateral.

Separately, there is an increasing demand to borrow securities with the intent to use them to develop ETFs.

Poikonen says: "From a pension fund perspective, they have a standard basket of securities on loan at market rates. It is interesting the actual demand to borrow those securities is ultimately for ETF creation. However, pension funds are often not aware the securities are lent for this purpose."

Experts agreed there is an increasing interest by institutional investors for ETFs, against a backdrop of a buoyant market.

Data by BlackRock, the largest ETF provider after it acquired Barclays Global Investors, shows assets invested in the global ETF market grew by 45% last year.

US equities make up the bulk of ETF assets under management as well as the greatest number of ETF products.

But, Poikonen says there is increasing interest in sovereign debt and fixed income ETFs, whose market is bound to grow.