So I keep around 10 percent of my holdings with wealthfront, as a hedge against my personal investing biases.
Recently they started offering securities lending as a feature and I opted in. Within about a week, someone grabbed 25k of LQD I have there as part of my portfolio. Not a particularly illiquid ETF I would assume (also interesting they were shorting bonds but different discussion). It executed 8/1 and closed 8/6. I had posted that I made $105 but that looks like a dividend I didn't hold during the execution window, so there is a small tax risk. But Wealthfront guarantees the trades as of now by requiring collateral held in trust during the trade period, so it seem like a my risk is very low. Anyone have any experience with it to tell me what I am missing risk wise?

This reads like a fully paid stock lending program. Wealthfront should be able to provide a breakdown of the risks associated with the program. It can be a way to capture some incremental (taxable) income on your assets. Risks generally include relinquishing the voting rights of the lent shares, losing SIPC coverage on lent shares, and changes to the tax treatment of dividends received for lent shares (i.e., cash dividends of lent shares may be paid to you as cash-in-lieu and taxed at that rate instead of the dividend rate).

The income amount will always be in flux based on eligible stocks, demand for a borrow, borrowing rate, and the length of time the stock is being borrowed from you.

It's fairly riskless but why would you do this? What is the benefit? What if WF is bought and the buyer screws up the records?

Thanks for the replies, as to why, just a few extra dollars to be made over time.
No company is 100 percent safe of course, but wealthfront has 80 billion in AUM now so they're pretty stable, and big enough that whomever buys them if it ever happens, will be a reputable org. I have actually been with them since they had like 2 or 3 billion AUM maybe? Over a decade now and followed their progress pretty closely, they have been well managed to now and pretty innovative, I've been an early adopter of a number of their programs, and they've usually worked out well for me.
They do have an FAQ page, but I also realize if they're doing it they expect to make money so they have a vested interest in getting people signed up, just wanted to see if there was anything I missed or they weren't being forthright about. So counter arguments were why I posted. Most of what's here is what I had considered thankfully.

I will probably let the authorization to do it ride the rest of the year, see what the earnings were, how annoying the additional tax work will be (juice vs squeeze) and then reevaluate.

Thanks again.

I think tysker nailed most of the risks above. I have looked at it before, and it makes some sense for a portfolio of purely long-term holds. If you intend to do any trading, it adds complexity and reduces flexibility going forward. Is the juice worth the squeeze? Only you can answer that (and I'd be curious what you've found, on average, the added annual income % you've experienced). In any case, I'd carefully read the provisions regarding exit from the program re: timing and notice required, and any exit fees or charges.

I bleed maroon said:

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I think tysker nailed most of the risks above. I have looked at it before, and it makes some sense for a portfolio of purely long-term holds. If you intend to do any trading, it adds complexity and reduces flexibility going forward. Is the juice worth the squeeze? Only you can answer that (and I'd be curious what you've found, on average, the added annual income % you've experienced). In any case, I'd carefully read the provisions regarding exit from the program re: timing and notice required, and any exit fees or charges.

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Unless someone is entering into a multi day contract which I have never heard retail investors being offered, I have never seen any impact on liquidity. I do these programs and it generates some nice income of the year and when I want to sell a stock that is lent out, I just sell it just as if I had never lent it.

The dividend risk is real because if you aren't the legal owner of the stock on the ex-dividend date, you get a payment-in-kind instead of a qualified dividend assuming the dividend would have qualified. I get around that by doing this in retirement accounts.

This is a well regulated system by brokers with plenty of collateral.

Kansas Kid said:

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I bleed maroon said:

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I think tysker nailed most of the risks above. I have looked at it before, and it makes some sense for a portfolio of purely long-term holds. If you intend to do any trading, it adds complexity and reduces flexibility going forward. Is the juice worth the squeeze? Only you can answer that (and I'd be curious what you've found, on average, the added annual income % you've experienced). In any case, I'd carefully read the provisions regarding exit from the program re: timing and notice required, and any exit fees or charges.

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Unless someone is entering into a multi day contract which I have never heard retail investors being offered, I have never seen any impact on liquidity. I do these programs and it generates some nice income of the year and when I want to sell a stock that is lent out, I just sell it just as if I had never lent it.

The dividend risk is real because if you aren't the legal owner of the stock on the ex-dividend date, you get a payment-in-kind instead of a qualified dividend assuming the dividend would have qualified. I get around that by doing this in retirement accounts.

This is a well regulated system by brokers with plenty of collateral.

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Generally agree, but during a black swan type event (such as in 2008), there were issues, for sure, at least for large institutions.