The GameStop saga earlier this year focused attention on the share-lending market, a financial arena that relatively few investors know about.
But if you bought an index fund in recent years, chances are you likely benefited from the share-lending revenue that the fund earned. This market is where investors go to borrow shares that they sell short—betting on a price decline. The lenders are primarily large mutual funds , exchange-traded funds and pension funds. Share loans outstanding in the U.S. are valued at nearly $1 trillion, according to Peter Hillerberg, chief technology officer at Ortex Analytics, a company that monitors the share-lending market.
The revenue that can be earned by lending shares is substantial: About $10 billion in total was paid out for the privilege of borrowing shares last year, Mr. Hillerberg says. Revenue from such loans is one of the reasons that some index funds are able to keep their expense ratios low. Only a small percentage of a typical company’s publicly traded shares will be sold short at any given time. Currently, the average for a company in the S&P 500 is about 1%, Mr. Hillerberg estimates. Not so for GameStop in January, however. Its comparable ratio on Jan. 14 rose to 175.9%, which suggests that nearly twice as many shares were sold short as are outstanding.
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