ETFs changed everything. Now it’s time to take them to the next level.

You could say ETFs changed everything.

They took the complexity of stock-picking, wrapped it in a low-cost, diversified package, and offered it to investors on a silver platter. Today, ETFs account for?$15 trillion??AUM globally, making them one of the most dominant forces in modern markets. And behind the scenes, they’re working even harder than you think.

The revenue engine inside ETFs

Investors may assume their ETFs are sitting idly in their portfolios, passively tracking an index. But in the background, ETF issuers are putting those holdings to work—lending out the underlying securities to generate additional revenue.

In recent years,?securities lending has contributed an average boost of 1 to 9 basis points to fund returns. This additional income helps offset operational costs and?reduce fees for investors. For example, Vanguard, who recently announced their largest fee cut in history, has been able to offset between 23-90% of their fund and ETF expense ratios.

Cambria has seen similar success, with some of its ETFs generating enough securities lending revenue to cover their entire expense ratios.

Investors may not realize it, but this mechanism is constantly at work, making ETFs more cost-effective and competitive.

Now for the real magic: investors can lend out their ETFs, too. ?

The?next layer of value generation

ETF issuers have been collecting extra revenue this way for years, but some investors don’t realize they have access to the same opportunity through fully paid lending. By lending out the ETFs in their portfolios, they can generate passive income while staying invested.

And the demand to borrow? It’s already there. ETF lending rates in the US averaged 73 basis points in 2024, according to an S&P report.

Who wants to borrow ETFs?

Some investors hesitate to lend stocks, fearing they’re handing their shares to short sellers who want to drive the prices down. While that’s a common misconception about lending in general (read more here), it’s even less relevant for ETFs—where borrowing is driven primarily by market making and hedge funds.

Market makers borrow ETFs to?keep bid-ask spreads tight, ensuring smooth trading and liquidity. Hedge funds use them for?arbitrage strategies, capturing small price discrepancies across markets. In fact, lending ETFs helps markets to function more efficiently, creating better outcomes for all market participants.

While there are associated risks, like the risk of a borrower default, these are considered relatively low. ETFs are highly diversified, operate within a well-regulated framework, and have built-in safeguards like overcollateralization and top-tier borrower selection. (Read more about the risks and how they’re mitigated here).?

These factors make ETFs a strong candidate for lending, offering a balance of opportunity and risk management.

The beauty of ETF lending

ETFs may seem passive—designed to make investing low effort—but the irony is that?they never stop working.?Behind the scenes, they’re always pulling double duty, finding new ways to generate value.

Why not lend them out and unlock their full earning potential? ?

As with all investment activities securities lending can involve risk, and past performance or demand does not necessarily predict future results. The inclusion of specific securities on this list does not constitute an endorsement or recommendation to buy, sell, or hold any security. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. Please note, the lending of an ETF or security is determined by market demand. If there is no demand, the asset will not be lent out.