I'm wondering......is there some way to put a NUMBER on Vanguard's securities lending? I don't mean comparing results of a couple funds since they're not necessarily going to 100% track the index or each other. Is there some place to see how much securities lending reduces the cost of a share by %? I've heard this a few places but nobody has numbers. Sort of like the statement that Fidelity is privately owned so makes a profit and the boogie man will raise the ERs when you're not looking.....and while people run around with their hands waving in the air waiting for the sky to fall, Fidelity lowers ERs again.
Well securities lending is different for each fund. It appears to be greatest with small-cap funds. I guess more people are borrowing those stocks. I don't know of a way of calculating it exactly unless Vanguard releases the information, but there is a way to get close. An index fund should have performance similar to its index minus cost.
Index performance - fund ER = fund performance. At least in theory. When this isn't true there is tracking error and/or securities lending. Tracking error is just another way of saying the fund manager did a bad job of tracking the index. It can be positive or negative, but even the positive is a bad sign because it can quickly turn negative. If the difference is always positive by roughly the same amount then you have good evidence for securities lending.
So the formula to find tracking error and securities lending would be...
Fund performance - Index performance + fund ER = tracking error &/or securities lending.
Let's use SCHB, VTI, and VXF as examples. All numbers as of 12/31/2016.
SCHB, ER=0.03: 1 yr, 12.56. 5yr, 14.58. Benchmark = 12.6 & 14.6.
1yr: 12.56-12.60+.03= -0.01 Negative. :(
5yr: 14.58-14.60+.03= 0.01 Positive.
I could find since inception data on Schwab's site for the fund, but not the index it was tracking at that time.
Conclusion: there is tracking error and it isn't consistent.
VTI, ER=0.05: 1yr, 12.68. 5yr, 14.63. Since 2001, 6.32. Benchmark = 12.68 & 14.64 & 6.34.
1yr: 12.68-12.68+0.05= 0.05. Positive.
5yr: 14.63-14.64+0.05= 0.04. Positive.
Since Inception(2001): 6.32-6.34+0.05=0.03. Positive.
Conclusion: it could be tracking error, but the fact that it is consistently positive by a few basis points implies some source of income is helping negate the expenses. The other conclusion is that VTI is only missing it's index by 0.02 over the long term even though it's ER is 0.05. The implication is that the costs for VTI after accounting for securities lending is only 0.02. This is cheaper than SCHB.
Now things get fun.
VXF, ER=0.09: 1yr, 16.16. 5yr, 14.65. Since 2001, 9.31. Benchmark, 15.95 & 14.55 & 9.23.
1yr: 16.16-15.95+0.09= 0.31. Positive.
5yr: 14.65-14.55+0.09= 0.19. Positive.
Since Inception(2001): 9.31-9.23+0.09= 0.17 Positive.
Conclusion: Securities lending. It is highly unlikely it is tracking error. It is too consistent over the long term and it is always positive by a significant margin. Note, the lending income is exceeding the cost of the fund. The implication is that Vanguard is PAYING you to own this ETF. Another conclusion is that the securities lending benefit to the Vanguard funds is increasing over time. That is very good for long term shareholders.