I have have shares in AAPL for ~ half year, and seriously thinking of lending them out. 1. are there any disadvantages of lending out the shares? eg if want to sell stocks lent out? 2. what % return can we expect? 3. do other option brokers do this?
1. are there any disadvantages of lending out the shares? eg if want to sell stocks lent out? No problem to sell stocks lent out, one issue is as a long you might be better off keeping the shorts out of borrowing opportunities, but you are unlikely to change much as an individual on a stock like AAPL 2. what % return can we expect? If you expect IB to find a borrower for you, on AAPL, ime, 0, I´ve had shares for a while and can´t remember they ever got lent out. Borrowing fee probably no more than 0.1% per year (fwiw it shows 0.35 on an AAPl ticket, but never noticed fee rates below 0.25 on the tickets, yet in account statement, the fee is around 0.04% on many large cap liquid stocks), of which IB keeps half. 3. do other option brokers do this? Dunno
https://ibkr.info/article/1838 From personal experience, the additional returns are very small. But that's probably because I mostly hold liquid S&P500 stocks and major ETFs.
If you let IB lend out your shares, don't you end up getting PIL for your dividends, which aren't treated as favorably for tax purposes?
The return is really tiny. I have aprox. quarter of a mil portfolio, loaned out about 40-60% time & value. I got about $35 last year, same the year before. Less than a single malt whiskey bottle
Is that still the case? I remember that used to be the case although IB said they would make an effort to avoid PIL when long-term tax treatment would otherwise be applied. But from the FAQ above, they now state: "Do participants in the Stock Yield Enhancement Program receive dividends on shares loaned? Yes. Stock Yield Enhancement Program shares that are lent out are segregated and IBKR will pay the dividend and not payment in lieu (PIL)." So sounds like that's no longer a concern? When you loan out the shares, you receive collateral valued at around 102% of the loaned out shares. So if the shares for some reason cannot be returned, you keep the collateral. Question is, how secure is that collateral?
Yeah, there's an interesting thread here where the IB rep basically repeatedly refused to answer that question while pretending to answer that question. Which tells me pretty clearly that it it's most probably a general obligation and you go to the back of the unsecured creditor line along with the construction company that just renovated Peterffy's executive bathroom and the pizza company that delivered pizzas to the last "customer service" appreciation party. They're not likely to go under any day now, but anyone who knows what they're doing charges a spread on the risk free rate to provide unsecured debt to IB to reflect the non-zero chance of their default....and anyone in the unsecured line which probably includes share lenders is providing it for free.
So when you lend shares out to a 3rd party, they deliver the 102% collateral in cash to IB (I assume that they deliver cash and not a form of credit or type of payment that requires a few days for clearing). So then that cash is deposited into the owner's account which should then be protected in the same way that your other cash is protected. IB even has some program where they split up your cash into multiple accounts held at separate banks to maximize the FDIC protection (Insured Bank Deposit Sweep Program -https://www.interactivebrokers.com/en/index.php?f=27462). I think the cash collateral is deposited into the user's account from this quote from the link that I posted above: "Customers who participate in the program will receive cash collateral to secure the return of the stock loan at its termination as well as interest on the cash collateral provided by the borrower for any day the loan exists." Key phrase is "customers...will receive cash collateral..." instead of customers will receive a credit or some other type of wording like that. So even if IB goes bankrupt, that cash collateral should be indistinguishable from other cash held in the user's account and subject to FDIC protection? I think the stock yield for loaned shares is completely different from commissions. What do stock and ETF borrowing rates have to do with transaction costs?