Does Wealthfront offer a securities lending program?

Yes. Wealthfront makes it easy to lend your shares from eligible accounts for additional income. This program is optional to clients.

What is securities lending?

Securities lending is the practice of lending your shares in exchange for income. You retain ownership of the shares while they’re on loan, and they remain visible in your account, allowing you to maintain oversight of your investments. Shares are also backed by cash collateral in case of default. 

How does securities lending work?

Simply enable securities lending in Settings. Wealthfront handles the rest: lending eligible shares based on demand, collecting your earnings, and keeping track of your income for tax time.

You maintain full ownership over your shares, including the right to sell them at any time.

(Because lending is based on demand, we can’t guarantee that any of your shares will be lent. Shares on loan may stop being lent if demand goes down.)

How are earnings calculated and paid? 

You will receive 50% of net revenue from any shares lent out. Revenue can fluctuate in line with lending rates, which are based upon borrower demand for each security. 

Lending interest payments will be deposited into your account monthly for any shares on loan during the previous month.

This interest accrues daily based on the lending rate for each loan. All income earned throughout the month is aggregated as of the end of the month. You’ll then be paid by the middle of the following month. 

For example, if you have a security on loan from March 1st to March 15th but then sell that security on March 16th, we will calculate the interest earned every day from March 1st to March 15th. You can expect to receive interest income payments for that security in early to mid-April.  

Interest income might come in the form of several different payments from different borrowers if you have multiple securities on loan. 

You can view your interest earned payments both directly in your account activity feed or aggregated into a summary under Settings > Securities lending

How do I know if the program is right for me? 

We’ll ask you a few questions to see if the program is a fit for you. If you meet the below criteria, you could be a good fit. 

Suitability Criteria

We evaluate clients’ suitability for lending based on:

• how long they’ve invested in stocks or ETFs
• self-reported knowledge of investing
• annual pre-tax income
• assets
• liquid net worth

These factors won’t make you ineligible for securities lending. They only affect the guidance we give you on whether we think it might be a good fit.

Who borrows shares and why?

The borrowers are usually financial hedge funds, institutional investors, or brokers. Borrowers have various motivations, including providing market liquidity, securing shareholder rights, hedging, or short selling. (While it might seem strange to lend your shares to someone who wants to bet against them, it’s worth bearing in mind that you’re ultimately just monetizing the demand for your shares.)

Borrowers can sell your shares, but are obligated to buy them again to return to you if you choose to stop lending. Buying and selling by people who borrow your shares won’t change your cost basis or affect your taxes.

What are some of the risks?

• There’s a very low risk that the borrower or Wealthfront will default. 
• Another small source of risk is that shares on loan are not covered by SIPC.

To mitigate these risks, cash collateral representing 102%-105% of the lent share's value is held in a trust to protect you. In the scenario where a borrower defaults, we’ve got your back. Wealthfront will either repurchase shares on your behalf using the cash collateral or return the cash collateral directly to you. 

For a full list of risks, see the disclosure.

How do I opt in or out of securities lending? 

You can quickly opt in or out of lending by going to Settings > Securities lending. This is also where you will see which shares are on loan and keep track of your earnings for each account. 

Once you’re enrolled, Wealthfront handles the lending, keeps track of your earnings, and deposits them in the appropriate accounts.

Which investment accounts are eligible?

Shares in the following taxable accounts will be available for lending:

• Automated Index Investing
• S&P 500 Direct
• Nasdaq-100 Direct
• Automated Bond Portfolio
• Stock Investing

The following account types are not eligible:

• Automated Bond Ladder
• IRA
• 529

Can I specify which accounts I want to lend from, or select specific shares to lend?

No. If you enable securities lending, all shares in all eligible accounts that you own as a primary owner will be eligible for lending based on demand.

How does lending work for joint accounts?

Lending for joint accounts is controlled by the primary account owner. If you haven’t opted in but see lending activity on an account you hold jointly, it may be because your co-owner has opted in.

How do dividends work?

If the borrower of one of your securities on loan holds the security on the record date, they will receive the dividend directly and compensate you with an equivalent amount in cash. This is called a “manufactured dividend” or “cash in lieu of payment”. 

Note: Manufactured dividends will be labeled as “dividends” in account transactions during the early access period, but will appear on account statements as “manufactured dividends.”

How are manufactured dividends taxed?

These payments are taxed as ordinary income (they’ll appear in Box 3 of your 1099-MISC) which can be higher than the rate at which your dividends are normally taxed. That said, our system is designed to only lend your shares if you stand to make more from lending income than what we’ll estimate you’ll owe in any additional taxes (though we can’t absolutely guarantee this will work in every case). 

Please note that Wealthfront does not provide tax advice. Investors are encouraged to consult with their personal tax advisors.

How does this affect my portfolio allocation and risk level?

We only lend out shares you already own, so your allocation and risk level won’t change.

Can I still sell shares while they’re on loan?

Yes. You can sell your lent shares as easily and quickly as unlent ones and realize gains and losses as you would otherwise.

What if I change my mind about this?

That’s fine! You can opt out anytime in your settings, with no penalty. If you opt out, any lent shares will be recalled and returned to you within 1 business day.

Is securities lending new?

No - big financial institutions have made money lending securities for years. What’s relatively new is the democratization of securities lending for individual investors.