1) Counterparty risk (low probability, but the “true” risk)
- When you lend shares, Fidelity becomes your counterparty.
- If Fidelity fails or cannot return your shares, you rely on collateral (≥100%) to recover value.
- However:
- Your actual shares are gone during the loan
- You may need to repurchase them in the market, possibly at a different price
Important nuance:
- Shares on loan are NOT covered by SIPC insurance.
Interpretation:
This is a tail risk—unlikely, but it’s the only scenario where you could lose principal.
2) Tax disadvantage (this is the most common real downside)
- Dividends become “cash-in-lieu” payments, not qualified dividends
- That means:
- Taxed at ordinary income rates instead of lower qualified dividend rates
For someone in retirement or high tax bracket, this can wipe out most of the lending income.
3) Loss of voting rights
- While shares are on loan, you cannot vote proxies
Usually minor, but matters for:
- Large holdings
- Shareholder votes / corporate actions
4) You’re helping short sellers (price impact risk)
- Your shares are often used for short selling
- In theory, that can:
- Increase downward pressure on the stock price
In practice:
- For large-cap ETFs/stocks, impact is negligible
- For small or heavily shorted stocks, it can matter more
5) Liquidity / timing friction
- You can sell anytime, but:
- There may be small delays in settlement or proceeds availability
Not a big issue for long-term investors, but:
- Could matter if you trade actively or rebalance quickly
6) Income uncertainty (often overestimated)
- Lending only happens if there’s demand
- Rates are:
- Variable
- Often very low for common holdings
Reality:
- You might earn:
- Almost nothing on index funds (e.g., VTI, S&P 500)
- More only on “hard-to-borrow” stocks
7) No downside protection
- Lending does NOT hedge your portfolio
- If your stock drops, you still take the full loss
Bottom line (practical framing)
Think of it this way:
Pros
- Small incremental income
- No effort required
- Can exit anytime
Cons (what actually matters)
- Tax inefficiency (biggest real cost)
- Tiny income for most investors
- Tail risk (counterparty + SIPC gap)
