By Dr. Jim Dahle, WCI FounderIn early 2024, Vanguard rolled out its “Fully Paid Lending Program” where individual investors could lend securities for short periods of time and be paid for doing so. This is generally a good thing for investors, where the fund lends out securities to short sellers and others and gets compensated for it. Vanguard has estimated this boosts returns by 1-16 basis points per year. It's not a lot, but that income can potentially entirely eliminate some of the very low Vanguard expense ratios.
(Note that the Fully Paid Lending Program is slightly different from the “securities lending” done by the Vanguard funds themselves.)
Let's talk about whether participating in Vanguard's Fully Paid Lending Program is worth it for a WCIer and how much money I made doing it.
What Is the Fully Paid Lending Program?
The Fully Paid Lending Program simply permits Vanguard to use the securities sitting in your brokerage account to lend to short sellers and then compensates you directly for it. In anticipation of writing this post, I signed up our largest account, a brokerage account in our trust, back in April 2024. It holds a relatively large amount of index funds representing most of the different stock asset classes in our portfolio. During 2024, that account has held all of the following securities . . .
- VTI
- ITOT
- VXUS
- IXUS
- VBR
- VIOV
- AVUV
- DFSV
- VSS
- AVDV
- VTEAX
- VMMFX
. . . and I permitted Vanguard to loan out as much as it could during the year. As I write this post in December 2024, let's see how much money we made.
How Much Money We Made
We were enrolled in this program for eight or nine months in 2024, and as you can see, most of the loans were just 1-4 days. That's not a lot of days on which to pay interest. Sometimes, the loan was a ridiculously small number of shares, like just six shares on April 8. Just because you have a lot in the account doesn't mean a lot of shares will be loaned out. At any rate, over the course of 8-9 months, there were seven total loans made, and we received a grand total of $37.54 in payments.
It's pretty hard to get excited about that.
Again, I want to emphasize this is a large account, probably more money than most WCIers retire with. If we could only make $38 all year doing this with a big account, how much do you think you're going to make with a $50,000 taxable account invested in similar securities? Not very much.
More information here:
How to Take a Required Minimum Distribution (RMD) at Vanguard
Update Prior to Publication
We're finally getting around to publishing this article in April 2025, so I thought adding a little current information might be helpful to those considering signing up.
As you can see, we've made another $14.46 in 2025. It seems the biggest benefit I've gotten out of this program so far is some material to write a blog post about.
Risks of the Vanguard Fully Paid Lending Program
To be fair, I didn't exactly take on a lot of risk to make this money, and $52 is $52. That'll buy a nice lunch for two at Chick-fil-A. OK, maybe lunch for just one after our 45% marginal tax rate is applied to it. There were some great Bogleheads forum threads about these programs at the various brokerage firms:
The risks were discussed in excruciating detail. The main ones seem to be losing qualified dividend status (although Vanguard makes you whole for this via cash-in-lieu-of payments) and losing SIPC protection on loaned shares. I even read a few stories about people making a few thousand dollars off loaned shares. They must be investing in something besides the typical broadly diversified, low-cost index funds that we advocate here at WCI. Or maybe it's just the fact that nobody wanted to short anything in 2024 when the market seemed to be going through the roof. Perhaps we'll leave the program turned on for another year or two until we go through a bear market and see if that changes anything.
How to Make More
Maybe you can make more if you do this at a brokerage where more investors are shorting stocks like Interactive Brokers or E-Trade. Maybe you can make more if you buy more volatile investments, like individual stocks. Maybe you can make more when markets are dropping. However, investing in a portfolio designed to maximize your fully paid lending income seems folly to me. I don't think anybody is primarily using this technique to reach any sort of significant financial goals.
More information here:
Securities Lending — Extra Income or a Mirage?
The Bottom Line
Should the typical index fund investor turn on the Fully Paid Lending Program in their Vanguard brokerage account? No. Focus on what actually matters with your finances:
- Boosting your income
- Increasing your savings rate
- Sticking with a reasonable long-term investing plan
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What do you think? Do you participate in the Fully Paid Lending program at Vanguard or elsewhere? How much money have you been making doing it? Any negative issues?
I have moved most of my investments (except for some in money market funds) away from Vanguard, so I have no direct personal interest in this topic. However, I am wondering if you had individual stock holdings, especially those that were frequently traded, higher short interest and volatile (think Tesla, Nvidia, Apple, etc.) whether your shares would have been lent out more and earned more for you.
I think they would have.
We have Fidelity’s fully paid lending in a Roth account (high 6 figures) and a taxable brokerage (low 7 figures). In the first 3 months of this year, the Roth has averaged $55 per month. The taxable brokerage sees about a third of that. There are similar securities in the 2 accounts. When we have the shares loaned out, it is usually the whole position, but like WCI observed, usually for a few days.
Fidelity’s program tries to get securities back before dividend payouts (so that you get the qualified dividends), but if they can’t, they give you a bit extra (calculated once per year) to account for tax treatment of the “payments in lieu” instead of dividends. That eats into their profits, so I think that’s why we get more lending in the Roth.
So what securities do you have in there?
The accounts have mostly a mix of index funds, Vanguard, Avantis, DFA, iShares. The ones that seem to get lent out the most are the Avantis funds: AVEM (emerging markets), AVSC (US small cap), AVDV (Intl small cap value), and AVDE (Intl developed market). I do have Apple (only single equity left over from more foolish times), but that one has not been lent out.
I wonder if Fidelity can do this more than Vanguard, maybe more active investors over there, dunno. Because you’re getting a lot more than I am off of similar stuff.
Did this at M1, made a few bucks, then had to figure out where to stick the income on my federal and state tax forms. Not worth it.
I have been signed up for the Program at Fidelity in taxable and IRA accounts. It was not that active last year with maybe $5-$15 per month. It has gotten really active this year with $70 in February and $137 so far in April. One of the funds earning the most is Vanguard Muni Bond Fund, VTEI. I also lend Vanguard and Ishares funds.
Sounds like Fidelity might just be a better place to do it than Vanguard.
I have it on both Fidelity and Vanguard accounts, and the Fidelity seems to do a little better, but I do hold some individual stocks in that account (I’m generally a passive index/rebalancer, but I let myself invest a small percentage in individual stocks, more for fun than anything). In both Vanguard and Fidelity I have very similar ETFs to yours (many of the same) – although I do the iShares ones in Fidelity (ITOT, IXUS, etc.). In Fidelity it seems to like to borrow iShares country-specific ETFs (e.g. EWW and EWZ), as well as gold/silver (IAU and SLV). When it does borrow individual stocks, especially small or mid-cap, the rates can be a lot higher, so I’m getting over $100/month, which is worth it, but you always have to be careful not to pick up nickels in front of a steamroller, but I figure that if Fidelity/Vanguard is the counterparty, the risk of their bankruptcy is very low.
(Just as an explanation, I have several country-specific ETFs because a large part of IEMG is China + Taiwan, which are both highly exposed, I figure, to China invading Taiwan (not just in direct impact but in offensive and defensive economic or financial sanctions) – so I try to overweight the other countries with country specific iShares (India, S. Korea, etc.). (EMXC still includes Taiwan) I guess that’s active, and the cost is a lot higher to add up country specific, but I figure I’ll pay it for a few years unless and until that looks a lot more remote.)
That’s my sense too, that more complex portfolios generate more income from lending out securities than my relatively boring one.
My guess is that’s a supply/demand issue. With the rise of passive investing, the supply of ITOT, IXUS, IVV etc. that’s available for borrowing is truly enormous (or could be, with a little effort in expanding these programs (marketing)). On the demand side, they are such broad-based indexes that borrowing to short probably is less in demand even with the proliferation of buffer funds (and other hedges like puts are probably more available/liquid). The more focused an investment is, maybe that draws more short selling (to bet against it) .
Of course, the interest rate factors into it. I don’t know how it’s determined but my uninformed guess is that Fidelity or Vanguard takes at least half of the interest (that may be wrong but I assume they get something (most?) unless a regulation stops them). I have been surprised how low the rates are. For something like LQD, I’m getting .5% right now. For country equity indexes, it’s like 1-1.25%. For individual small cap stocks, I’m getting one at 4% but I’ve seen 6-8%. But assuming the counterparty is safe, it’s like free money, and the broader the index, the more money I have in it, so so far it’s Ok (not amazing, but it’s something). And while those rates sound low for a loan, I would imagine rates that are even a little higher would draw a lot more supply.