A few readers asked about “fully paid lending programs” offered by some brokerage firms. The premise is very intriguing: You lend out the stock shares you own and earn interest, all while keeping full “economic” ownership. You still get any upside or downside, you can still sell at any time, and your loans are backed by 100%+ collateral at a custodial bank. The broker finds borrowers, collects interest, and splits it with you (usually 50/50). Is this zero-effort free money? These programs can go by various names:
- Fidelity Fully Paid Lending Program ($25k min)
- TD Ameritrade Fully Paid Lending Income Program
- E*TRADE Fully Paid Lending Program
- Firstrade Securities Lending Income Program
- Interactive Brokers Stock Yield Enhancement Program
From Fidelity, here is a hypothetical example of how interest is calculated using an annualized lending rate of 8.50%.
Are the interest rates really that high? Fintel.io publishes “Short Borrow Fee Rates”, which they define as “the interest rate that must be paid by a short seller of [stock] to the lender of that security.” At the time of this writing, that fee was 0.25% APR for Tesla (TSLA) stock and 0.48% APR for Gamestop (GME) stock. That’s a far cry from 8.5%.
Still, if you have a large portfolio of stocks, even earning 0.10% in annual interest can become significant if it involves no extra effort.
Important factors to consider. After researching and comparing the details for each of these programs, here’s what I found.
- Understand the mechanics of this collateralized loan. Shares on loan are not covered under Securities Investor Protection Corporation (SIPC). Counterparty default is thus a risk, and this is why the SEC requires that the broker provides collateral at a minimum of 100% of the loan value to be held at a third-party custodian bank. If the broker can’t pay, then you can request the collateral. Still, it could be a potential headache if the broker doesn’t follow the rules properly, as warned by this SEC letter.
- You will get paid cash instead of your usual dividend payments while your security is on loan, and those two things may be taxed differently. Loan proceeds are usually taxed at your marginal tax rate (treated as ordinary income). Oftentimes, qualified dividends are taxed at a lower rate than ordinary income rates. Some brokers adjust for this difference, while many do not.
It is possible you might lose more money due to these tax differences than gained through lending income. - Eligibility requirements vary by broker. For example, TD Ameritrade doesn’t allow margin accounts so you’ll have to downgrade to a cash account first. This may affect your ability to trade immediately with unsettled funds. Meanwhile, Fidelity requires a minimum account value of $25,000.
- Participation doesn’t guarantee that your shares will be borrowed. Typically, securities that do get borrowed are in high demand or limited supply. Usually, they are used to facilitate short sales.
- Interest rates paid vary. Don’t get too excited by the interest rates quoted in their hypothetical examples. It’s unlikely you’ll be earning a 8% rate for an entire year.
- You give up proxy voting rights while your security is on loan.
I’ve never participated in such a program, but I have decided to try out the Fidelity Fully Paid Lending Program. I chose Fidelity for the following reasons:
Minimal counterparty risk. I view Fidelity as one of the most stable and reputable brokers, which means they are the least likely to have any issue paying back these loans. In addition, they have so much other business in high-compliance areas (401k plans, etc) that I trust that they will actually put up the proper collateral. Fidelity doesn’t need to take undue risks and is used to sweating the details.
Fully adjusting lost dividend income for taxes. Fidelity not only pays you any dividend income you miss due to them borrowing your stock, they adjust their payment higher to cover the maximum in potential taxes (26.98%). Perhaps another broker does this, but I didn’t see it spelled out explicitly and transparently like Fidelity. Otherwise, I might lose more money due to taxes than gained through lending income.
In order to mitigate the impact of cash-in-lieu payments to taxable accounts, Fidelity may return shares prior to a dividend record date. To help offset the potential tax burden associated with the receipt of cash-in-lieu payments in place of qualified dividends (as defined in the Jobs and Growth Tax Relief Reconciliation Act of 2003), Fidelity will credit participating taxable accounts with an additional credit adjustment equal to 26.98% of the qualified portion of the distribution. This adjustment will occur annually after all reclassification information is made available.4
Unfortunately, Merrill Edge and Vanguard do not seem to have such programs. I am currently in the process of transferring some securities into my Fidelity account to meet the minimum threshold.
If you have any experiences with these fully paid lending programs (good or bad) with any broker, please feel free to share in the comments. It’s been hard to find “real world” numbers on how much interest income to expect on a basket of mixed stocks.
Update: I posted an update on my real-world Fidelity securities lending income. Spoiler alert: The income has been miniscule.
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So Firstrade had a pop-up on the web site for this a few times a couple years ago. Seems like a terrible deal. Even with select Blue Chip companies, you can get anywhere from a 2-5% dividend or more, obviously subject to adjustment at any time based upon a company’s financial performance. And dividends are taxed at a preferred rate. So I very much decided to pass.
I guess if you have growth stocks that pay no dividends maybe this makes sense? I only invest in high quality dividend paying companies, so it made no sense for me.
Based on what Jonathan stated Fidelity compensates for the lost dividend and plus gives you extra with tax money. Not sure what you are referring to Jason?
So it looks like at Firstrade, they do not reimburse for taxes, which is why I decided it was a raw deal:
“While you do not receive dividend payments directly on the stocks that are on loan, you will receive Payment in Lieu equal to the value of dividends paid on loaned shares. These payments will be taxed at your marginal tax rate rather than the prevailing dividend tax rate.”
They use Apex Clearing and it seems that’s just how Apex rolls.
I also invest in stocks no one cares about borrowing, so I was unlikely to ever see any action anyway. Select blue chips are boring.
I’ve been participating via E*TRADE for a while and have never had a problem. It does create a lot of transactions showing the collateral going into and out of your account every day, not that it really matters.
You’re only going to get decent interest on “hard to borrow” stocks. Things that shorters are trying to kill. For example E*TRADE is currently paying ~21% for GP (GreenPower Motor).
Common/safe big companies don’t seem to ever get lent out. CocaCola, T-Mobile, Starbucks, etc. Occasionally some ETFs get lent out, with ARK funds being some that get decent rates.
Do you have any experience as far as what E*TRADE pays you? Do they make up missed dividends? Do they adjust for potential taxes?
Thanks.
E*TRADE pays 50% of what they get lending your stocks. So it all depends on what stocks you own and if they are in demand or not.
As far as dividends, I had my first dividend paid on a stock that was lent out today. And it looks like they paid an extra ~17%. Though the transactions are sort of confusing. (Paid whole dividend for all shares, paid dividend again for shares lent out, partial dividend reversed for shares lent out.)
Do you mind sharing which securities were loaned out?
The one with the dividend today was Panasonic (PCRFY). It was paying 0.6% but it was only lent out a single day, the day necessary for them to get the dividend.
Here are some others that are currently lent out and what they pay me:
HTZ: 2.3996%
DNUT: 8.0165%
GP: 21.4894%
ARKK: 2.85%
ARKG: 1.4785%
ARKF: 0.2042%
ARKX: 0.3302%
VGLT: 0.4098%
VCLT: 0.4362%
VGIT: 0.5747%
So some of them return very little, but it all adds up.
Interesting, I just noticed that they did the same thing in my IRA. (Paid whole dividend for all shares, paid dividend again for shares lent out, partial dividend reversed for shares lent out.) So I got the extra ~17% to cover taxes on the dividends in my IRA, when I don’t have to pay taxes. Score!
It will be interesting to see how this is all reported on the 1099 come tax time.
Thanks Michael for sharing in this thread. So are you saying your return is 17% cumulative on the lending of all your ETFs? You itemized percentage on each ETF. So I am assuming your cumulative dividend return per ETF and adding all your ETF returns = 17%?
But at what level of assumed risk to capital?
Very little risk. There is collateral put into a separate account in case the borrower isn’t able to return your stocks. And the collateral amount is adjusted every day as the stock price changes. The worst that could happen is the borrower is unable to return your stock and you get the cash that was securing the loan. The only time I would think that would be a problem would be if the stock shot up in price in one day. (And even then your broker would probably make good on the loan vs. defaulting.)
Oh, I was thinking in terms of buying possibly esoteric funds or companies that happen to be of interest to someone that wants to borrow stock, just because you might get the opportunity to earn interest by loaning out the security. That to my mind is a possible risk.
I guess if Firstrade offered to reimburse taxes as well, I’d give it a go with my existing securities anyway. You never know.
No, the percentages I listed for each security are the fee paid for them borrowing the stock. (It is accrued daily for the days while a stock is lent out.)
The ~17% is a “bonus” on just the dividend that was paid. i.e. Panasonic paid a $0.132643/share dividend and I received about $0.15519231/share, but only for the shares that were lent out. (They only borrowed about 60% of the PCRFY shares I hold.)
And Panasonic is the only one I had that has paid a dividend while it was being lent out. (None of the ETFs I have were borrowed when a dividend was paid.)
Ally Invest also has a fully paid securities lending program.
Another useful place is iBorrowDesk, which publishes Interactive Broker’s stock loan availability and borrowing rates so you can check for yourself how much a loaned stock could earn.
Thanks Michael for the clarification!! I need to do some digging but most of my Fidelity holdings are individual stocks primarily blue chip, along with REITs and BDCs and international ETFs.
Personally, I think the ‘lending’ of shares is terrible for your average investors. It contributes to market volitility and allows brokers to play games with how many outstanding shares a company actually has.
This is how short sellers cover their position, even if the amount of available shares does not actually support covering their bets, and the brokers actively facilitate it because it gets them more revenue.
In the past many brokers or market makers did this with customers knowledge or compensation. During the meme stock wars last year Ally opted me in automatically and also made it hard to opt out of.
Hi,
I also used the Firstrade program for a little while (longer than I should have). I received a Payment in Lieu of Dividend, which was fine. However, the change in my taxation rate (dividend vs the payment) was much more than the scant amount of money I earned by loaning out my shares (<$1/month). Also, it has been difficulty, if not impossible to find out how much I would make on each security BEFORE signing up. I do not recommend this program if you have a Firstrade account. However, it appears that Fidelity's may be better. Also, another person commented that having more infrequently traded shares and/or shares that don't pay dividends might offer more upside.
Not immediately obvious from the post or links. Can a person use this in Roth or Trad. IRA plans?
Yes, you can. At least at E*TRADE.
Good question. I don’t want to make a blanket statement as perhaps it varies as with cash/margin accounts, but yes in general. Fidelity, E-Trade, and TD Ameritrade all allow IRAs to participate.
Does it only work for individual stocks? Or can you lend out ETFs like VOO?
Yes, ETFs can be lent as well, but there has to be demand, which there isn’t normally a lot of.
Here are some ETFs that I currently have lent out and the rate that they are paying:
ARKK: 2.85%
ARKG: 1.4785%
ARKF: 0.2042%
ARKX: 0.3302%
VGLT: 0.4098%
VCLT: 0.4362%
VGIT: 0.5747%
My takeaway is: If you hold one or more securities that typically do not pay dividends, this might be worthwhile.
If anyone is looking for an estimate of what it costs to short a stock, and the subsequent payout, check out the site below. If pulls its data from a free feed at Interactive Brokers.
https://iborrowdesk.com/
For example, if the ‘fee’ to short a stock is 0.3%, you would earn a percentage of that. So if IBKR is still paying half, you would earn 0.15% in this scenario.
This was a very helpful post and the comments were also helpful, thank you! For some of the folks who have now received their 2021 tax documents, how bad was the hit from having to pay at regular rates vs. the preferred dividend rate? I am considering doing this at Fidelity because they offer an additional true-up amount to offset taxes.
I would like to participate in this program but I would also like to sell covered calls of the security I lend out. Is it possible to do this? Thanks for your help!
Fidelity does not allow covered calls on a stock on loan, I’m not sure of any others. I haven’t received a payment yet but from the looks of it the ones I have on loan will pay more in interest than I would make on covered calls.
So while the shares are lent out. can you trade options on those (selling covered calls and puts)
Fidelity does not allow covered calls on a stock on loan, I’m not sure of any others. I haven’t received a payment yet but from the looks of it the ones I have on loan will pay more in interest than I would make on covered calls.
Thanks all very much appreciate everyone’s input. I have this on my accounts at E*TRADE and Td Ameritrade. It does seem that E*TRADE gives you more interest.
Currently have a position in a small biotech that pays me approximately 4 1/2% so that means that the actual person who is wanting the loan is paying 9% because the broker takes half.
But my question and concern is this. The small biotech company that I own it has been hypothesized, to have been naked shorted by some very large hedge funds to the tune of many billions of shares. Basically they tried to put the company out of business and make it go bankrupt, which is what their goal is because then they never have to cover, but that did not happen and now the bio tech has potential of a new drug that may have an enormous upside potential.
My question is whether my upside is going to be muted because of this loan program. In that they Hedges likely won’t be able to pay back any shares because they have naked shorted the heck out of it previously. So I’m worried that they’ll give me my collateral back, but the shares that I own, that I now may want to sell at say 10 times the amount of the collateral because they have went up won’t be available for them to pay me back in shares.
I’m wondering if that is a risk and could I be muting my potential upside by being involved in this fully paid lending program. Any insight anyone would have would be very much appreciated.
The current minimum for enrollment at Fidelity is $25K.
Thanks, I’ve updated the post to reflect that and also added my update post with my actual (tiny) income numbers.
https://www.mymoneyblog.com/fidelity-brokerage-securities-lending-real-numbers.html
The statement that “ME and Vanguard do not seem to have such programs” is no longer true for Vanguard, they do have such a program now (2024)