Demand is high for borrowing bond exchange traded funds (ETFs)
and ETFs that provide exposure to emerging markets, especially
Russia and China, according to Markit.
Logistical difficulties associated with shorting traditional
bond products and shorting within emerging markets have made
borrowing ETFs an attractive alternative for investors, despite
higher fees to borrow than other securities.
"Fees generated through lending out ETF assets have generally
held up despite the fact that the available pool of ETF assets
to borrow from stands at an all-time high. Currently, return to
lendable of US listed ETFs is five times higher than equities
in the same market," said Andrew Laird, analyst at
Of the 20 US ETFs with the highest indicative fees to borrow,
six are bond ETFs several offer exposure to emerging markets,
according to the report. Indicative fees for these funds range
from 6% to 10%, with the highest fees to borrow for the
Vanguards intermediate term corporate bond ETF and the
Wisdomtree international hedged equity fund ETF.
Bond ETF's can be used as channels to circumvent logistical
issues and allow investors to take a view on rising interest
rates that are at historic lows.
ETFs have also become an alternative means to get short
exposure to countries that have restrictions on short selling
of equities or don't have mature securities lending
This phenomenon will grow in the coming years as many of the
833 and growing non-US ETFs that trade in the US offer an
increasingly diverse set of products, according to
"Paying 7% a year to borrow an Indonesian basket in a
relatively liquid market starts to make sense when looking at
the logistics needed to borrow the constituents in the domestic
market whose borrow fees often do not match that of the ETF,"
The majority (73%) of US ETFs that Markit covers have a fee
greater than 150bps, although they rarely rise above
Rates have remained consistently high for the Proshares ultra
vix short-term futures ETF for the past two years and currently
stand at 8%. The ETF has been a particularly profitable trade
for shorts having had an "abysmal" price performance ranging
from -69% to -5% in the three years up to Q2 2014.
Despite high fees, ETF borrowing has boomed over the past
decade. The total value on loan for US exchange traded products
(ETPs) has risen to $48bn, up from $30bn in April 2012. The
value amount covers 1900 products in total.