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How to Get Your Money Managed for Free


Despite the investment industry's minefield of conflicting interests, in many ways the landscape has never been tilted more favorably toward the individual investor.

This article is published with permission from

Read the polls and you'll see people are sick and tired of Wall Street's self-dealing and its big, fat fees.

Indeed, there is much to dislike about the big investment banks.

Yet, despite the industry's minefield of conflicting interests, in many ways the investment landscape has never been tilted more favorably toward the individual investor. You can thank deregulation, technological innovation, and the internet.

US financial markets have never been deeper, more liquid, or more transparent. When I first got into the money management business 29 years ago, many stocks had bid/ask spreads of an eighth of a point or a quarter. Today the spread is usually a penny or 2. Commissions—even at Charles Schwab—often ran a few hundred dollars.

Now, ordinary investors routinely execute trades at $5 a transaction. Trade confirmations that took several minutes are now confirmed online in seconds. And there has never been a wider selection of no-load funds and low-cost exchange-traded funds (ETFs).

This is the heyday for ordinary investors. Expenses have dropped so low, in fact, in many cases you can get your money managed for free.

Expenses are zero

How is this possible? Because the expense ratio on some ETFs has dropped to a negative number, making shareholders' costs effectively zero.

The secret is securities lending. Funds often lend out their shares to short sellers (investors betting stocks will go down) for a fee. This income can offset not only a fund's management fees, but all of its overhead also.

For example, BlackRock's iShares Russell 2000 Growth ETF (NYSE: IWO) took in $15.5 million in securities lending revenue last year. That was 0.35% of assets, more than covering BlackRock's quarter of a point fee for running the fund.

Schwab U.S. Small Cap (Nasdaq: SCHA), SPDR S&P Biotech (NYSE: XBI), and Vanguard Small Cap Growth (NYSE: VBK) also had zero expenses.

It just doesn't get much better than this. Because, all things being equal, the lower your costs, the higher your net returns.

Small-cap advantage

Why are so many of these ETFs with zero costs small-cap funds? Because the lending premiums are greater on small companies. That means they generate more annual revenue.

For instance, BlackRock has more than $4 trillion in assets under management. Its securities loan department takes in more than $1 billion in lending fees annually. This money finds its way back into the hands of iShare funds … and their shareholders.

This isn't just a positive for you. It can also be a plus for your registered investment advisor, if you're using one. After all, he isn't getting a piece of ultra-low ETF expenses anyway. And since he wants you to earn the highest return possible (net of his fees), these funds make perfect sense for him, too.

In fact, you might forward this to him … because he probably doesn't know.

Alexander Green is the chief investment strategist at See more articles by Alexander here.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.

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