XEQT Securities Lending: How BlackRock Earns Extra Revenue With Your ETF

I still remember the moment I stumbled onto this. I was reading through an iShares fund document one evening – one of those dense PDFs that nobody actually reads – when a line caught my eye: “securities lending revenue.” I paused. Revenue from lending? I thought the stocks inside my XEQT were just sitting there in some digital vault, quietly appreciating in value while I went about my life. Turns out, BlackRock was lending those stocks out to other people while I held them.

That discovery sent me down a research rabbit hole that lasted the better part of a weekend. What I found was actually pretty fascinating, and ultimately reassuring. But I realized that most Canadian investors who hold XEQT have no idea this is happening behind the scenes. So let me walk you through everything I learned about securities lending inside XEQT – what it is, how it works, the risks, and whether you should care.

1. What Is Securities Lending?

Securities lending is a practice where an ETF provider – in this case, BlackRock – temporarily lends out the stocks held inside a fund to other market participants. Those borrowers are usually short sellers, market makers, or institutions that need shares for various trading strategies.

In simple terms, think of it like renting out your parking spot while you are at work. You are not using the spot during the day, someone else needs it, so you let them use it for a small fee. You still own the spot. You get it back at the end of the day. And you pocket a little extra cash for the trouble.

That is essentially what BlackRock does with the stocks inside XEQT and its underlying funds. They lend them out temporarily, collect a fee, and the stocks come back. The key difference from our parking spot analogy is that BlackRock also demands collateral from the borrower – more on that shortly.

Here is what makes this relevant to you as an XEQT investor: securities lending is not some obscure or unusual activity. It is standard practice across virtually every major ETF provider in the world, including Vanguard, BMO, and others. It has been happening for decades in the institutional investing world, and it is fully disclosed in fund documents.

2. How Securities Lending Works Step by Step

Let me break down the actual mechanics of how a securities lending transaction works inside an iShares fund like XEQT.

The Lending Process:

1. BlackRock identifies lendable securities. Not every stock in the fund gets lent out. BlackRock’s lending desk evaluates which holdings are in demand from borrowers and which can be lent without disrupting the fund’s operations.

2. A borrower requests specific shares. This could be a hedge fund that wants to short a particular stock, or a market maker that needs shares to settle a trade. The borrower approaches BlackRock (through its lending agent, which is a BlackRock subsidiary called BlackRock Advisors) and requests to borrow a specific number of shares.

3. The borrower posts collateral. Before any shares change hands, the borrower must post collateral worth at least 102% of the value of the borrowed securities (or 105% for international securities). This collateral can be cash, government bonds, or other high-quality assets.

4. The shares are transferred to the borrower. The borrower receives the shares and can use them for whatever purpose they need – usually short selling or settling another trade.

5. Daily mark-to-market adjustments. Every single day, the value of the borrowed securities is recalculated against the collateral. If the stock price has risen and the collateral no longer meets the minimum threshold, the borrower must top up their collateral immediately. This ensures the fund is always protected.

6. The borrower returns the shares. When the borrower no longer needs the shares, they return them to the fund. The collateral is released back to the borrower, and the lending fee is collected.

7. Revenue is split. The lending fee revenue is divided between BlackRock (which keeps 37.5%) and the fund itself (which receives 62.5%). The fund’s share goes directly toward reducing the effective cost of holding the ETF.

A Visual Summary:

3. Who Borrows These Stocks and Why?

You might be wondering: who exactly is borrowing these shares, and what are they doing with them? There are several types of borrowers, each with different motivations.

Short Sellers

The most well-known borrowers are short sellers. These are investors or hedge funds who believe a stock’s price will fall. To profit from that belief, they need to borrow shares, sell them at today’s price, and then buy them back later at a lower price. The difference is their profit. To execute this strategy, they need to borrow the actual shares from someone – and that someone is often an ETF like XEQT’s underlying funds.

Market Makers

Market makers are firms that provide liquidity in the stock market by continuously offering to buy and sell shares. Sometimes a market maker sells a stock to a buyer but does not actually have the shares in their inventory yet. They borrow shares temporarily to settle the trade while they source the actual shares. This keeps markets running smoothly.

Arbitrage Traders

Some institutional investors engage in arbitrage strategies, where they exploit small price differences between related securities. For example, if an ETF is trading at a slight premium to its underlying holdings, an arbitrage trader might short the ETF and buy the underlying stocks (or vice versa). These strategies often require borrowed shares.

Institutions Settling Trades

Sometimes, a large institution simply needs shares to settle a trade that is about to fail. Settlement failures can result in penalties and regulatory issues, so borrowing shares temporarily to avoid a “fail to deliver” is common practice.

Who Are These Borrowers Typically?

4. How Much Revenue Does Securities Lending Generate for XEQT?

Let me be upfront about this: the revenue from securities lending inside XEQT is small. We are talking about a few basis points per year – not a game-changer by any means, but a nice little bonus.

XEQT itself is a “fund of funds,” meaning it holds four underlying iShares ETFs rather than individual stocks directly. The securities lending happens at the level of those underlying funds:

• ITOT (iShares Core S&P Total U.S. Stock Market ETF)
• XIC (iShares Core S&P/TSX Capped Composite Index ETF)
• IEFA (iShares Core MSCI EAFE ETF)
• IEMG (iShares Core MSCI Emerging Markets ETF)

Each of these underlying ETFs participates in securities lending to varying degrees.

The Revenue Split

iShares uses a 62.5% / 37.5% split for securities lending revenue:

• 62.5% goes back to the fund (and by extension, to you as the investor)
• 37.5% goes to BlackRock as compensation for running the lending program

This split is actually competitive. Some fund providers keep a larger share for themselves. Vanguard, for example, returns 100% of securities lending revenue to its funds, but their lending programs tend to generate lower absolute revenue. Other providers keep 40-50% or more.

Estimated Revenue Impact

The actual revenue varies year to year depending on market conditions and borrowing demand, but here is a rough sense of the numbers:

Emerging market stocks (IEMG) tend to generate the most securities lending revenue because those shares are often harder to borrow and in higher demand from short sellers. Developed market large caps generate less because they are abundant and easy to source.

For XEQT as a whole, the blended impact is probably in the range of 1-3 basis points per year of revenue flowing back to the fund. On a $100,000 portfolio, that translates to roughly $10 to $30 per year. Not life-changing, but it does help offset a small portion of XEQT’s 0.20% MER.

5. The Collateral Protection System

This is the part of the securities lending process that I found most reassuring when I first researched it. The collateral requirements are genuinely robust.

Collateral Requirements

When a borrower takes shares from a fund, they do not just walk away with them. They must post collateral that exceeds the value of the borrowed shares:

• 102% minimum collateral for domestic (U.S. or Canadian) securities
• 105% or more for international or less liquid securities
• Some programs require up to 112% collateral for certain types of loans

This means that if a borrower takes $1,000,000 worth of stock, they must hand over at least $1,020,000 to $1,120,000 in collateral. The fund is actually holding more in collateral than the shares are worth.

What Counts as Acceptable Collateral?

Not just anything qualifies as collateral. BlackRock accepts:

• Cash (U.S. dollars or other major currencies)
• U.S. Treasury securities (government bonds)
• Government agency securities
• Letters of credit from approved banks

These are all high-quality, liquid assets that can be quickly converted to cash if needed.

Daily Mark-to-Market

The collateral is not just checked once and forgotten. Every single trading day, the value of the borrowed securities is compared against the collateral:

• If the borrowed stocks increase in value, the borrower must post additional collateral to maintain the minimum ratio
• If the borrowed stocks decrease in value, some excess collateral may be returned to the borrower
• These adjustments happen daily, meaning the fund is never significantly under-collateralized

What Happens to Cash Collateral?

When borrowers post cash as collateral, BlackRock does not just leave it sitting in an account. The cash collateral is typically invested in short-term, conservative instruments like money market funds, repurchase agreements, or short-term government securities. This generates a small additional return, but also introduces a minor element of reinvestment risk (which I will cover in the risks section).

6. The Risks of Securities Lending

No investment activity is completely risk-free, and securities lending is no exception. Here are the risks you should understand.

Counterparty Risk

Counterparty risk is the risk that the borrower defaults – meaning they cannot or will not return the borrowed shares. If a borrower goes bankrupt while holding your fund’s shares, the fund would need to use the collateral to buy replacement shares on the open market.

In theory, this should be fine because the collateral exceeds the value of the borrowed shares. But in a fast-moving market crisis, stock prices could spike rapidly, and there is a brief window where the collateral might not fully cover the cost of repurchasing the shares.

How BlackRock mitigates this:

• Over-collateralization (102-112%)
• Daily mark-to-market adjustments
• Borrower creditworthiness screening
• Diversification of borrowers (not lending everything to one counterparty)
• BlackRock provides borrower default indemnification on iShares ETFs, meaning BlackRock itself would cover any shortfall if collateral is insufficient

That last point is significant. BlackRock essentially guarantees that if a borrower defaults and the collateral is not enough to make the fund whole, BlackRock will cover the difference out of its own pocket. This is a powerful backstop.

Reinvestment Risk

When borrowers post cash collateral, that cash is reinvested in short-term instruments. There is a small risk that those reinvestment vehicles could lose value. During the 2008 financial crisis, some securities lending programs did experience losses on cash collateral reinvestments because they had invested in instruments that turned out to be less safe than expected (like certain money market funds that held mortgage-backed securities).

Since then, regulations have tightened considerably, and the types of instruments used for cash collateral reinvestment are much more conservative.

Market Stress Risk

During periods of extreme market stress, there is a theoretical risk that:

• Many borrowers try to return shares simultaneously, creating operational strain
• Collateral values and borrowed share values diverge rapidly
• Liquidity in certain markets dries up, making it harder to buy replacement shares if a borrower defaults

These scenarios are unlikely but not impossible. The 2008 crisis and the 2020 COVID crash tested securities lending programs, and while there were some hiccups in 2008 (particularly around Lehman Brothers’ collapse), the system has been significantly strengthened since then.

Risk Summary

7. Why BlackRock Is Motivated to Manage This Well

One thing that gave me comfort during my research was thinking about BlackRock’s incentives. BlackRock manages over $10 trillion in assets globally. Their entire business model depends on institutional and retail investors trusting them with their money.

If a securities lending program ever caused a meaningful loss to an iShares ETF, the reputational damage would be catastrophic. The amount of money BlackRock earns from securities lending fees (their 37.5% cut) is tiny compared to the management fees they collect on their massive AUM. They have every incentive to run a conservative, well-managed lending program.

Here is why BlackRock is motivated to keep securities lending safe:

• Reputation risk: A single lending-related loss could trigger billions in outflows from iShares products
• Regulatory scrutiny: Securities lending is closely monitored by regulators in the U.S. (SEC), Canada (CSA), and globally
• Indemnification liability: Because BlackRock guarantees borrower defaults, they have skin in the game – a reckless lending program would cost them directly
• Competitive pressure: If iShares had a worse securities lending track record than Vanguard or other competitors, investors would move their money
• Scale advantage: BlackRock’s sheer size means they can be selective about who they lend to and negotiate strong collateral terms

Think about it this way: BlackRock earns approximately 0.075% (their 37.5% cut of maybe 0.02% in lending revenue) on a fund, while charging a 0.20% MER. They are not going to risk the management fee income by being reckless with the lending program. The math simply does not support it.

8. How Securities Lending Revenue Compares Across XEQT’s Underlying Funds

Not all of XEQT’s underlying funds generate the same amount of securities lending revenue. The amount depends on factors like:

• Borrowing demand: Stocks that are popular to short generate more lending revenue
• Supply of lendable shares: If a stock is widely held and easy to borrow, the lending fee is lower
• Market region: Emerging market and small-cap stocks typically command higher lending fees
• Market conditions: During volatile periods, short selling activity increases, driving up lending fees

Comparison of Underlying Funds

The emerging markets component (IEMG) punches above its weight in securities lending revenue despite being the smallest allocation. This is because emerging market stocks are more difficult to source for borrowing, so borrowers are willing to pay higher fees.

Conversely, the U.S. component (ITOT) is the largest allocation but generates relatively modest lending revenue per dollar invested, because U.S. large-cap stocks are extremely liquid and widely available for borrowing.

9. Should You Worry About Securities Lending in XEQT?

After spending a weekend deep in fund documents and regulatory filings, my honest answer is: no, you should not worry about it.

Here is why I came to that conclusion:

The Revenue Is a Small Net Positive

Securities lending generates a small amount of extra revenue that flows back into the fund. It is not enough to materially change your returns, but it does help offset a tiny fraction of the MER. You are getting a small benefit at essentially no practical cost to you.

The Safeguards Are Substantial

The combination of over-collateralization (102-112%), daily mark-to-market adjustments, conservative collateral requirements, borrower screening, and BlackRock’s default indemnification creates multiple layers of protection. For a borrower default to actually hurt you, several of these safeguards would have to fail simultaneously.

This Is Standard Industry Practice

Securities lending is not unique to iShares or BlackRock. Vanguard does it. BMO does it. State Street does it. Virtually every major ETF provider engages in securities lending. If you switched from XEQT to VEQT or any other all-in-one ETF, your new fund would almost certainly be doing the same thing.

The Regulatory Environment Has Improved

Post-2008 regulations have significantly tightened the rules around securities lending. Collateral requirements are stricter, transparency is better, and lending programs are more conservatively managed than they were before the financial crisis.

Historical Track Record

iShares securities lending programs have operated for over two decades across thousands of funds and trillions of dollars in assets. The track record of actual losses to fund investors from securities lending has been effectively zero for iShares funds, thanks in large part to BlackRock’s indemnification.

What Actually Matters More

If you are a long-term XEQT investor, the things that will have a far greater impact on your returns than securities lending include:

• How consistently you contribute to your portfolio
• How long you stay invested through market ups and downs
• Whether you avoid panic selling during downturns
• Your overall asset allocation and whether it matches your time horizon
• The fees you pay on your brokerage platform (use a commission-free platform to minimize costs)

Securities lending is a background process that generates a tiny positive return with well-managed risk. It should be roughly item number 847 on your list of things to think about as an investor.

The Bottom Line

When I first discovered that BlackRock was lending out the stocks inside my XEQT, I felt a flash of concern. It felt like someone was doing something with my stuff without asking. But after digging into how the program actually works – the over-collateralization, the daily monitoring, the indemnification, the conservative reinvestment guidelines – I came away feeling genuinely reassured.

Securities lending inside XEQT is a well-regulated, well-managed practice that generates a small positive return for the fund while operating within a robust risk management framework. The borrowers post more collateral than the shares are worth. BlackRock personally guarantees against borrower defaults. And the revenue split means 62.5% of the income goes directly back to you as a fund investor.

Is it something you need to actively monitor or worry about? No. Is it worth understanding so you know what is happening with your investment? Absolutely. And now that you understand it, you can go back to doing what actually drives your long-term returns: buying XEQT consistently, holding it patiently, and letting compounding do its work over the decades ahead.

Related Reading

• What is XEQT? A Comprehensive Guide
• XEQT MER: Understanding the True Cost
• Is XEQT a Good Investment?
• Best Platform to Buy XEQT in Canada
• XEQT for Beginners