"Stock Yield Enhancement Program" of Interactive Brokers

[Dr.PI]

@Koreba

but a day before pay date

Yes it is actually this day that determines who get dividends. On ex day dividends are already have been distributed.

[johndoe1]

I find the concept of securities lending quite interesting (in theory, at least). It would allow ETF-holders to participate in option trading profits, no matter if the stock markets fall or rise (benefiting from volatility). So returning to the original question:

1. Does anyone know what the average return on investment is for ETF lending, e.g. regarding VT, VTI or VXUS? I imagine it’s a lot lower than for Gamestop, Tesla and the likes.

2. On the concept of ETF lending vs. stock lending: I’m still not sure whether this leads to a double lending situation, a) the ETF provider lending the stocks within the ETF and b) the individual ETF-owner lending the ETF as whole. To me, that seems kind of unsettling.

3. I assume ETF providers earn way more by lending the stocks within an ETF than we can earn by lending our whole ETF, due to much higher trading levels on an individual stock level. Wouldn’t it be fair for ETF-providers to let us participate in these profits?

4. Just to be clear: As ETF-owners we don’t own a single stock contained in our ETF. Vanguard or Blackrock’s the owner of the individual stocks. Hence, we have no shareholder rights. Has anyone ever been bothered by that?

[jay]

@johndoe1

On the concept of ETF lending vs. stock lending: I’m still not sure whether this leads to a double lending situation, a) the ETF provider lending the stocks within the ETF and b) the individual ETF-owner lending the ETF as whole. To me, that seems kind of unsettling.

That’s possible even without ETFs. If someone borrows a stock and then sells it, the buyer can’t tell whether the stock was borrowed or not and that buyer can lend the ‘same’ stock again. Theoretically, even to the same short seller. The possibility of more stocks being shorted than total free float may indeed be concerning for a particular company. E.g. hedge funds excessively shorting a single company. I don’t expect this to be an issue in practice for an ETF.

@johndoe1

I assume ETF providers earn way more by lending the stocks within an ETF than we can earn by lending our whole ETF, due to much higher trading levels on an individual stock level. Wouldn’t it be fair for ETF-providers to let us participate in these profits?

Investors do profit from funds lending stocks. It effectively reduces the ongoing charges. You can see the profits from stock lending in the annual report of each fund.

@johndoe1

Just to be clear: As ETF-owners we don’t own a single stock contained in our ETF. Vanguard or Blackrock’s the owner of the individual stocks. Hence, we have no shareholder rights. Has anyone ever been bothered by that?

Are Vanguard/Blackrock acting in your interest?

I just read the following Twitter thread, which got me thinking: Marc Andreessen: Ah, but the shareholders themselves are mainly not applying the pressure, rather their managerial agents–professional investment managers–are. See for example Larry Fink, who owns ~0.0000001% of the capital he speaks for. Elon Musk: Exactly, decisions are being made on behalf of actual shareholders that are contrary to their interests! Major problem with index/passive funds. PEG: Deeper problem: according to Mo…

[johndoe1]

Thanks for sharing, very interesting! Now, for small positions securities lending might not be worth your time, but what about a portfolio of, say, 500k VT? Any idea how much annual yield (percentage of total position) this would amount to?

[johndoe1]

So there’s the problem: VT’s not been lent out, but I’m sure IBKR has made substantial profits for example from the FAANGs inside your VT. Are you sure these are all passed on to you as lower ETF-costs?

[johndoe1]

@CHRad

You should read up how an ETF works. IB doesn’t own any of the FANG’s of your ETF, Vanguard does. And Vanguard collects it’s interest and reduces the cost of the fund. In any case: This is not IB’s business, but Vanguards. You can read up on the yearly summary sheet for stuff like that

Typo, I meant Vanguard, of course.

Just saying, in theory, having a single stock global portfolio, could maybe yield quite some securities lending profits. At zero ETF costs.

For me personally though, it’s not worth the hassle.

[Dr.PI]

@CHRad

change it to a cash account.

This is not correct. You just shouldn’t have debts.

[ChickenFat]

How can I see in my IB account how much I was paid for the participation in the lending program?

[Dr.PI]

Activity report, there are few sections about SYEP.

[johndoe1]

@CHRad

Either the borrower paid WHT, can claim it back and thus owes me the full amount OR I paid it and can therefore claim it back. And Idk why IB has such troubles just listing the PIL with a 35% tax deduction… Like no one cares who actually paid, but it has been paid in any case.

Any updates on this issue? I’m trying to get my head around securities lending for ETFs, and I’m still not sure whether it’s worth it.

[San_Francisco]

@CHRad

What’s not going to happen is that the tax is inevitably lost… That would be super unfair.

What would be “unfair” about it?
It would just be costs you incur for your additional income from securities lending.
There’s no such thing as a free lunch.

@CHRad

Either the borrower paid WHT, can claim it back and thus owes me the full amount

Who says the borrower is necessarily eligible for such refund? Couldn’t there be borrowers that are not eligible for such a refund?

@CHRad

And Idk why IB has such troubles just listing the PIL with a 35% tax deduction… Like no one cares who actually paid

The whole Cum-Ex Scandal is proof that it does matter who actually paid.

[johndoe1]

Thanks for the update, that’s very interesting, good luck with your query, I’m really curious how they’ll respond to it!

So no problem with US-domiciled ETFs then, if I understand you correctly?

But so far, your VT has never been lent out? That’s kind of surprising, because there clearly is an options market for VT, just look at the options chain on IB or any other broker.

Also, I’ve read that quite some people are following conservative options strategies with VTI / VT like covered calls, it’s become pretty mainstream. And looking at the current volatility, options trading should be running hot.

[San_Francisco]

@CHRad

Yeah no that’s not how WHT works and what it’s there for and the document I linked above proves exactly that.

Withholding tax exists to make that securities income gets taxed (“properly”), even in an cross-border context. While it is, in principle, often refundable, there’s often cases where it’s not. In other words: Withholding tax having been deducted doesn’t guarantee that it can be reclaimed.

@CHRad

And securities lending isn’t free btw. You need to declare those interest payments as income, so “the price” for it will be a tax on it’s revenue, not on the WHT.

That doesn’t mean that WHT can’t become a cost though. Compare it to Irish ETFs: They aren’t able to have 15% US withholding on US stocks refunded either. It’s an additional cost, as opposed to holding US ETFs.

@CHRad

I linked a document above

Yes - but I suspect (and am asking you) whether you did quote the appropriate paragraph, see here…

@CHRad

As long as there are not multiple lenders after you and stuff, but that isn’t the case in IB

Well, yes, that is the case though, isn’t it?

“Interactive Brokers LLC (“IB”) offers eligible customers the ability to lend certain of their fully paid and excess margin securities to IB for on-lending to other IB customers or to other market participants” (Important Characteristics and Risks of Participating in Interactive Brokers LLC’s Fully-Paid Securities Lending Program)

This is, as I understand it, no. 3.2.2 in the tax administration’s document you linked (rather than 3.2.3).
Also, what about “Weiterveräusserung” in this context?

“Sofern der letzte Borger in der Transaktionskette die geborgten Wertschriften zur Erfüllung einer Lieferverpflichtung verwendet oder veräussert…” (the linked ESTV document)

Doesn’t this happen - or couldn’t it, with IBKR’s lending program?

“When you lend your Fully-Paid Securities, it is likely that such securities will be used to facilitate one or more short sales or satisfy delivery requirements resulting from short sales.” (Important Characteristics and Risks of Participating in Interactive Brokers LLC’s Fully-Paid Securities Lending Program)

Continuing with the ESTV guidance…

…kann keine der in der Transaktionskette involvierten Parteien einen Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer geltend machen. Der Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer steht grundsätzlich der Person zu, welcher die Wertschriften vom letzten Borger in Erfüllung einer Lieferverpflichtung oder infolge Veräusserung übertragen wurden" (ESTV again)

No refund for you, unless I misunderstand or am missing something, am I?

(…which I may. I just gave this a cursory glance. Also do note that IBKR warns you of potential adverse tax consequences of securities lending)

[San_Francisco]

@CHRad

It’s imho a pretty clear thing

For me personally, I have my doubts whether it’s that clear (see my previous post).

Also, I noticed someone else in your reply above:

@CHRad

Case 1:

@CHRad

Case 2 (relevant for me, since I don’t care if the borrower can claim back WHT… lol):

Please refer back to the ESTV document.

Both these diagrams refer to a domestic borrower: “eine Person mit Sitz oder Wohnsitz im Inland (B)”.

I’m pretty sure that IBKR (whatever their entity applicable) is not considered a domestic resident

@CHRad

this is just a reporting issue. If tax can be reclaimed or not doesn’t really depend on securities lending either

Oh, it definitely is a reporting issue.

But that is the thing with withholding taxes:
They do exist (partly) for that very reason: Because reporting on the ultimate beneficial owner of and recipient isn’t always available or possible.
Also, the practical refundability of withholding tax is subject to reporting and/or proof. Which can get hairy, once you cross borders multiple times.
What should not be a big (but a mere reporting) issue in theory, may very well become an insurmountable in practice.

Coming back to the ESTV guidance (my: remarks in bold)

"Borgt eine im Ausland ansässige Person (IBKR) von einer in- oder ausländischen Gegenpartei (you) Wertschriften, deren Erträge der Verrechnungssteuer unterliegen, und verleiht sie diese an eine ebenfalls im Ausland ansässige Gegenpartei (unknown, but probably foreign) weiter, sind folgende Konstellationen zu unterscheiden:

b) Sofern der letzte Borger in der Transaktionskette die geborgten Wertschriften zur Erfüllung einer Lieferverpflichtung verwendet (IBKR: “When you lend your Fully-Paid Securities, it is likely that such securities will be used to (…) satisfy delivery requirements”) oder veräussert, kann keine der in der Transaktionskette involvierten Parteien einen Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer geltend machen. Der Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer steht grundsätzlich der Person zu, welcher die Wertschriften vom letzten Borger in Erfüllung einer Lieferverpflichtung oder infolge Veräusserung übertragen wurden."

What’s wrong with my reasoning?

(…that they’re may be cases where you’re not entitled to reclaim WHT. Except that you don’t like the result or amount of substitute payment Which may, I guess, be the reason why don’t report a tax withheld on their statements)

[johndoe1]

@San_Francisco

kann keine der in der Transaktionskette involvierten Parteien einen Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer geltend machen

Damn, what a rabbit hole! So you basically have no control over how your securities will be used. How often do you think your lending results in “satisfying delivery requirements”? Is that basically the case whenever call options are exercised?

Anyway, if that’s really the case I think IB should have to pay you the full dividends in these cases, without WHT, otherwise it’s an unfair deal.

[jay]

@CHRad

Why would IB or I care if the borrower paid taxes? I don’t give a f… But he owes me the gross dividend OR the net dividend with a proof of paid taxes. It’s actually really simple imho - else, IB or whoever can keep the taxes and no one knows where they went.

I agree. Any potential risk here should be carried by the borrower. The fee of borrowing a stock for a day is surely much lower than a typical dividend. If the borrower doesn’t want to cover that risk, they shouldn’t borrow the stock at dividend time. I expect the normal case to be that the borrowed stock is sold, in which case the borrower has to compensate the gross dividend anyway, don’t they?

[jay]

For non-US ETFs I actually never had to send any proof. I declare the ETF with all transactions and the dividend amount is automatically calculated from ICTax data. Verrechnungssteuer information is also taken from ICTax. At least ZHprivateTax says there is no need to attach broker statements for these cases and they also haven’t requested any statements after the tax decalration. I.e. in the tax authorities wouldn’t even know about regular dividend payment vs. payment in lieu.

That said, I anyway keep all my Swiss fonds at a Swiss broker and use IBKR only for foreign fonds.

[Dr.PI]

@CHRad

I am actually a bit tired of discussing this with someone who isn’t really helping… yeah maybe, ybe not.

If you don’t like the answer, it doesn’t mean that the person giving it is not helping. @San_Francisco might be sarcastic sometimes, but no one can say that s/he is not helping. S/he does a lot.

@CHRad

As long as you are not IB or a tax professional, this information isn’t really worth anything to me.

Well, you don’t know that @San_Francisco is not a tax professional. Considering his/her personality, s/he might as well be.

I think you can forget about this withheld tax, but I might suggest you a technical solution for future: create a subaccount, disable securities lending in it and transfer there securities that you don’t want to be lent out.

Although keeping your CH allocation in Viac is also good and tax advantageous.

[Dr.PI]

And I think you also don’t completely understand how withholding tax works. It is not IB or borrower that deducts it. It is send to the tax authority directly by the company paying the dividend, so no one ever gets it.

[San_Francisco]

@CHRad

I am actually a bit tired of discussing this with someone who isn’t really helping… yeah maybe, maybe not. As long as you are not IB or a tax professional, this information isn’t really worth anything to me.

We don’t have to discuss this, and I’ll be the first one to admit I’m merely an with a keyboard, and not a tax professional. With all respect though, considering that you

1. Are the top poster in this thread by number of posts by far
2. Actively invited other people’s opinions on the matter and your interpretation (“Has anyone here a clue if I am right?”)
3. “wanted to provide the information for anyone after” yourself in this thread
4. …some of which of was demonstrably quoting the wrong/inapplicable information (no multiple lenders, domestic borger).

I’m quite honestly a bit perplexed by your attitude shown here. Since this thread is, as you said, also for the benefit of others, I also do feel somewhat compelled to at least factually point out the things I’m not following you on.

@CHRad

If WHT was paid, it must be reported, I am going to insist on that

Why does it have to be? You aren’t receiving a dividend payment (for which WHT was withheld), but merely a substitute payment. For which no WHT was withheld - and IBKR “told you” that it may have adverse tax consequences. Furthermore, IBKR may be prohibited from reporting a tax withheld to you - to prevent exactly that: You going reclaiming a tax refund from your tax administration, when the actual recipient of the dividend does the same.

@CHRad

Even if WHT is irrecoverable, IB must report that it was paid

Yes - but possibly not to you - since you aren’t receiving the actual dividend payment.

@CHRad

OR the borrower owes me the gross amount

…says who?

Your personal sense of fairness and entitlement?
Or IBKR’s terms on securities lending? Honestly, I can’t find it there. You’re receiving the same net amount that you’d also receive without lending. And they do tell you that receiving substitute payments may have adverse tax consequences.

@CHRad

He basically told me what Jay did. I shouldn’t bother to send proof, as I already declared the shares and for Swiss WHT, they usually don’t ask for further proof.

That’s a practical of reclaiming of getting that money.
And you’ll most probably get away with it.

I’m still not convinced that you can be sure you’re legally entitled to that refund - especially when and where IBKR doesn’t report withheld WHT to you.

@CHRad

Either the borrower pays gross dividends or IB provides me the 35% deduction in my statements. I don’t think that there is any other fair solution to this. Who knows if IB kept the refunded tax from the borrower, but actually got a refund etc…?

Well, life ain’t always fair.

The thing is: It happens all the time. Especially with withholding taxes.
Holding German stocks in Yuh? Good luck getting that tax voucher for the Germans!
Reclaiming WHT from your French stocks with IBKR? No problem, they’ll “facilitate” it for you. You only pay 125€ for each attempt at dividend recovery - whether successful or not. Side note: This example and the fact that IBKR holds the securities in their street name further illustrate the subtle difficulties in practically reclaiming WHT.