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Despite recent regulatory efforts, fund fees remain murky to most regular investors. But a high-profile investor lawsuit against BlackRock, whose iShares funds dominate the business of exchange-traded funds, may finally shine a light on one of the least-understood aspects of those costs.

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At issue is what is known on Wall Street as securities lending, a practice in which mutual funds and ETFs pay agents to help them lend out shares in their portfolios to Wall Street traders and earn interest. The practice can boost profits—it generated about $10 billion in annual revenue for mutual funds and other investment pools, estimates research firm Markit—as well as investor returns.

But a lawsuit filed last month in a U.S. District Court in Tennessee by two little-known pension funds argues not enough of that extra money is making it back into the hands of shareholders. BlackRock says it remits about two-thirds of the revenue it earns from securities lending to investors, while the rest goes to cover costs and boost the bottom line. The lawsuit—brought by the Laborers Local 265 and Pipefitters Local No. 572—says that is well below rivals like Vanguard, which passes all share-lending profits on to fund holders. The suit charges BlackRock with “self-dealing.”

While experts say investor lawsuits typically face long odds in court, they add that this case may help clarify a controversial area of the ETF business, and perhaps spur changes that could help investors. For example, investor lawsuits in the 401(k) arena have recently led to greater disclosure and lower prices. “You want sunlight,” says William Birdthistle, a law professor at the Illinois Institute of Technology who specializes in investment companies. “Lawsuits like this can provide an investor education.”

Gavel

For its part, BlackRock, which says it will vigorously contest the suit, has long said comparing its lending policies to competitors is misleading. While BlackRock may profit from its lending program, investors ultimately benefit with “above average returns—over time,” the firm said.

Some independent observers agree. Dave Nadig, director of research for ETF website IndexUniverse.com, says head-to-head calculations he performed for at least one of the funds in the suitiShares Russell 2000 Value ETFshow investors coming out ahead, despite the higher fees.

Others aren’t so sure. John C. Adams, a University of Texas at Arlington finance professor, who has studied share lending, says arrangements similar to that of iShareswhere an affiliate of the fund’s parent earns a cuthave ended up costing investors in the long run. Working with researchers from Virginia Tech and the University of Colorado, Mr. Adams recently examined returns from 226 mutual funds between 2003 and 2009. They found that conducting lending through affiliates lowered returns to investors by 70%. “It all boils down to incentives,” Mr. Adams says.