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Many investors aren’t aware they could be earning an extra 20 per cent or more in income on some of their stocks. Moreover, there isn’t much risk: It’s like discovering some money of yours was in a storage bin you didn’t know existed, and it could be claimed after completing a form.

Take the shares of Electrovaya Inc., a maker of lithium-ion batteries, as an example of how much income can be earned. If you had held a position over the year to Oct. 12, you would have earned a capital gain of 4.8 per cent on the stock itself but if the appropriate form had been filled out, you would have also received daily income adding up to a hefty yield of 40 per cent for the year.

Many investors don’t receive this extra income. They don’t even seem to be aware that it exists. Where does it come from?

When an investor opens a margin account with a broker, they will typically be asked to sign an agreement that allows the broker to lend out securities in the account. The broker can then lend the securities to short sellers and collect interest from them. The interest is charged on the dollar value of the shares for as long as they are loaned out.

“Under current regulatory rules, most brokers keep this interest income,” said Steve Sanders, executive vice-president of marketing and product development at Interactive Brokers Group Inc. On large-capitalization stocks, the interest rate isn’t usually very much. But for small-cap and microcap stocks, a low supply of loanable shares relative to demand can often push up borrowing rates to quite elevated levels.

For example, the five most costly stocks to borrow on Oct. 12 were: Spratt Physical Platinum Trust (171.4 per cent), Sproul Canada Inc. (128.3 per cent), Link Global Technologies Inc. (104.2 per cent), Electrovaya Inc. (85.2 per cent) and CGX Energy Inc. (82.9 per cent). The interest rates will change daily but usually trend in an orderly fashion. For many small-cap and microcap stocks, high lending rates can persist for more than a year.

According to IHS Markit’s Securities Finance H1 2021 review, more than $200-million in revenue was generated by stock lending in Canada during the first half of 2021. That’s no small change.

Which brokers share the loan payments on your stocks?

In Canada, there are a couple of brokers where you can get a share of the short sellers’ loan payments. The first is Interactive Brokers, which launched their stock yield enhancement program (SYEP) in 2017. “Once a client has applied, they can receive half the interest payments on their fully paid stocks that have been loaned out,” Mr. Sanders said.

Fully paid stocks are those held in a cash account, which Interactive Brokers requires to have equity greater than US$50,000 (about $62,000 Canadian at current exchange rates). Fully paid stocks are also those held in a margin account with excess margin as defined by Interactive Brokers (further details on the SYEP are available on the broker’s website).

The other broker in Canada to share the loan payments is National Bank Direct Brokerage, which is affiliated with National Bank of Canada. They also share 50/50 the loan revenues generated on fully paid stocks.

“Our Security Lending Program is currently available only by invitation to existing clients,” said Claude-Frédéric Robert, president of National Bank Direct Brokerage. “However, it should become more widely available once posted to our website by December or January.”

(The Globe and Mail reached out to several other online brokers, who either confirmed they did not offer such a program or did not immediately respond to requests for comment.)

Why not get your share?

If your research finds some good investment opportunities among small-caps and microcaps, check out their loan rates quoted by the broker or on If they are substantial and you are buying the stock anyway, there is money to take off the table by simply filling out an application form.

Wait a minute, you might say. Don’t studies show that when a stock is targeted by short sellers, it tends to underperform?

True, but the studies refer to an average tendency, so there will be times when short sellers get it wrong. Also, the low trading volumes of most small caps deter institutional investors and hedge funds, thus keeping sophisticated and professional short sellers mostly out of this niche. Lastly, when trading volumes are low, short squeezes can occur more easily.

What kind of performance should you expect from stocks with high loan rates? We performed a preliminary analysis (see accompanying table) on a list of 20 costly-to-borrow shares from a previous Globe article, Short Sales on the TSX: What Bearish Investors are Betting Against (Sept. 29, 2020).

The capital gains and losses ranged from 916.8 per cent (Obsidian Energy Ltd.) to minus 76.6 per cent (Neptune Wellness Solutions Inc.) over the year to Oct. 12. If an equal dollar amount was placed in each stock at the beginning, the overall capital gain on the 20 stocks would be 57.8 per cent.

The average lending rate for individual companies over the year ranged from 10 per cent (Lithium Americas Corp.) to 80 per cent (Electrovaya Inc. and Cathedral Energy Services Ltd.). For investors enrolled to receive half of what the short sellers pay the lending broker, the average income yield would be nearly 20 per cent.

It should be noted that there was some turnover among companies. UrtheCast Corp. sought creditor protection and its shares were delisted (about a week before the column was published). Eastmain Resources Inc. and Painted Pony Energy Ltd. were acquired by other companies at premium prices shortly after the table came out (so they generated only capital gains, not any income).

Securities lending generates a great deal of revenue and investors can receive a share at some brokers in Canada. Many small- and microcap stocks are hard to borrow, so loan fees can be quite elevated on them. If you are the kind of investor who buys stocks in this market segment, you might want to investigate adding loan revenues to your returns.

Performance of most expensive shares to borrow, Sept. 29, 2020 - Oct. 12, 2021

to 10/12/21 (%)
to 10/12/21 (%)
Lending rate
at Sept. 29, 2020
UrtheCast Corp.UR-Tn/an/a356.4
Calfrac Well ServicesCFW-T-51.360.0122.6
Electrovaya Inc.EFL-T4.880.087.9
Eastmain ResourcesER-T22.70.086.9
Cathedral Energy Svcs.CET-T317.480.083.6
Chesswood Group Ltd.CHW-T102.270.079.7
Cardiol TherapeuticsCRDL-T32.435.068.0
Ethos Gold Corp.ECC-X8.025.067.1
Resverlogix Corp.RVX-T-50.555.062.4
Erdene Resource Dev'tERD-T-15.450.059.0
Platinum Group MetalsPTM-T-6.835.057.9
Oncolytics Biotech Inc.ONC-T-5.835.056.4
Batero Gold Corp.BAT-X-
Mega Uranium Ltd.MGA-T119.230.051.7
Obsidian Energy Ltd.OBE-T916.820.045.8
Painted Pony EnergyPONY-T40.80.045.3
Alexco Resource Corp.AXU-T-41.720.043.4
Neptune Wellness Sol.NEPT-T-76.625.042.3
Lithium Americas Corp.LAC-T31.510.040.3

Source: Larry MacDonald; Interactive Brokers

Larry MacDonald is a semi-retired economist who blogs at

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