It’s been a full year since I started to try out the Interactive Brokers Stock Yield Program to increase the yield on my shares by lending them out in a rather safe way.
In short, here’s what the program contains:
- You own shares or ETFs purchased through Interactive Brokers
- You lend these shares to IBKR, in exchange for collateral in the form of U.S. Treasury bonds or cash
- IBKR then lends your shares to other traders who are willing to pay interest on this loan (to sell short, which is a way of trading…)
- And every day your shares are loaned, you receive interest based on market prices
- You can stop this IBKR program subscription anytime you wish
You’ll find more information in my original article.
Is the IBKR Stock Yield Enhancement Program worth it?
Over the past year, I’ve had the following in my portfolio:
- Total worth of ETFs and stocks: CHF 322'000
- Share of ETFs (VT and VWRL): CHF 282'000 (88%)
- Share of Daubasses stocks: CHF 40'000 (12%)
And here you can see my activity report from September 2022 to September 2023:
So in total, for one year, I earned… CHF 4.86 in interest… Impressive :D
After closer inspection, my VT ETF was loaned out 95% of the time.
So if I were to have 1 million Swiss francs in my portfolio, I would have earned CHF 20 in interest. Ugh.
After all, it’s not surprising since stock traders have more fun trading Tesla or Nvidia rather than the VT ETF.
Is the IBKR Stock Yield Enhancement Program risky?
Well, legally, I can’t say it’s risk-free because you’re lending your securities in exchange for collateral.
Nevertheless, after a year of experimentation, I’ve never used the Interactive Brokers’ collateral. As a result, I haven’t lost any shares or other ETFs.
What about dividends and tax refunds?
This is where you have to be careful…
As I explained in my article last year:
When the day comes to pay dividends, it’s the one who owns the stock on the day who will receive those dividends. But don’t worry, because if this happens to you, IBKR will pay you this amount via a “dividend compensation” which simply means that it makes you a credit note. So you don’t lose the dividend. BUT, via a “dividend compensation”, IBKR doesn’t handle any claims to recover the withholding tax… that money is lost forever.
So I looked into the details and indeed, I did have compensation instead of dividends (visible in the “Dividends” section of my IBKR activity report):
Then I looked in the “Withholding Taxes” section, and IBKR also withholds withholding taxed on these dividend compensations:
The next question would be: will the Swiss tax authorities accept these dividend compensations as “real” dividends?
To date, I’ve still had to justify quite a few documents for 2022 to the tax authorities (how lucky, a tax audit ^^). And they haven’t told me anything about this, and have taken all dividends into account, including dividend compensations.
Obviously, when it turns out that it’s a tax problem, I’ll stop this program immediately, as I have more to lose in terms of US withholding tax refunds than in terms of gaining the few Swiss francs in interest.
UPDATE 24.11.2023: thanks to Paolo for shedding some light on the subject! Indeed, in Switzerland, securities lending is treated in the same way as direct ownership of financial assets. See circular letter nr. 13 from the FTA:
MP family decision on this stock yield enhancement program
Even if the interest is ridiculous, this Interactive Brokers program has the advantage of not requiring any additional effort on my part in terms of budgeting or portfolio management.
Furthermore, I’m confident in Interactive Brokers and its founder with regard to the guarantees they offer as collateral for these stock loans.
Nonetheless, I have my doubts about the Swiss tax authorities, who might nitpick and decide not to give me a tax credit to reimburse the withholding tax on these dividend compensations.
But since it’s been quiet all year long, I’ve decided to keep the yield enhancement program active.
I don’t think I’ll see much change in the next few years in terms of the interest we receive. But you never know :)
And as usual, I like to “get my hands dirty” so I can talk about these things concretely with real numbers (and not just theory) — especially regarding taxes.
The Interactive Brokers Stock Yield Enhancement Program is interesting for making your money work even harder, without taking undue risk. Nevertheless, this program is mainly aimed at investors with a portfolio of specific stocks (like Tesla) rather than global ETFs (comprised of 8'000+ companies).
Even though the program has only earned me CHF 4.86 in one year, I’m going to keep it active while keeping an eye on it to make sure it doesn’t hurt my US withholding tax refund.
I don’t think I will get rich with it, but you never know what will happen tomorrow… all it would take is for the VT ETF to become a one-week hype ^^
I’m keeping it mainly out of curiosity so that I can talk about it concretely on the blog.
If you want to test it out yourself, you can follow this link to find out how to activate Interactive Brokers’ Stock Yield Enhancement Program.
How about you, how much interest have you earned through the Interactive Brokers Stock Yield Enhancement Program? And above all, which stocks did you loan? And what about your DA-1 tax credit refund?