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I'm not an investing pro, so I checked it out a little deeper. It looks like they'll be making money in the background by selling short calls to other investors

I'm not an investing pro, so I checked it out a little deeper. It looks like they'll be making money in the background by selling short calls to other investors and collecting interest on those. So they want this front end to be super low friction; your money will be making them money. It seems that e.g. Vanguard will also waive their fees under some circumstances. (Hope I got that right)

howeyc 8y ago
I think you're close. I believe they loan shares to short sellers. Selling short calls would leave them open to the risk of shares being called away and would be an entirely different fund. You can buy ETFs that do this, some distribute the premium and others roll it into the fund's cash.
whitepoplar 8y ago
Almost all index funds participate in share lending. Vanguard does, and almost 100% of income is returned to shareholders. Blackrock's iShares does this too, and Blackrock keeps ~20-30%. As far as I know, Vanguard's expense ratio for their total market fund (VSTAX) is effectively 0% after income from share lending.
- evrydayhustling 8y ago
  This, exactly. It's worth noting that this is one of a few income streams that take advantage of retail investor appetites -- another is when when retail brokers who do "smart routing" of orders lease a feed with advance look at those orders to HFT firms. That kind of income is generally NOT returned to investors, and at some retail brokerages can make up 80% of profits. It's true that if something is free you are the product... but even when you're paying you may be getting sold on the side.
- tanderson92 8y ago
  > and Blackrock keeps ~half. This is untrue. Per iShares(https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf https://www.ishares.com/us/literature/brochure/securities-le...): > Q: How much of the securities lending proceeds are paid to iShares ETFs? > A:. iShares ETFs receive 71.5-80% of the income generated from securities lending depending on the asset class held. For example, iShares ETFs that predominantly hold US equities receive 71.5% of the income from securities lending. All other funds (i.e., fund-of-funds and funds that invest predominantly in fixed income or international equities) receive 80% of the income from securities lending. Once the aggregate securities lending income exceeds a certain income threshold amount, each iShares ETF will receive an increased percentage of the income above original levels, i.e. from 71.5% to 75% for US equity iShares and from 80% to 85% for all other iShares, for the remainder of that calendar year. By the way, Fidelity isn't making money off of securities lending on these funds, or at least has pledged not to. I still wouldn't use the funds, though.
  - whitepoplar 8y ago
    Thanks for the correction. Fixed.
  - p10_user 8y ago
    Curious, why wouldn’t you use these funds? Do you still prefer ishares or vanguard?
    - whitepoplar 8y ago
      Not parent, but I wouldn't use these funds because there's a fundamental conflict of interest. Fidelity is a private company that seeks to profit from its customers. Vanguard is a company owned by its customers. What happens in the future if passive indexing falls out of favor, there's an exodus out of index funds, and Fidelity jacks up fees? If you're investing in a taxable account, you'd (presumably) incur a capital gain to leave the fund. At Vanguard, expenses may increase, but they won't seek to profit off of you. In a tax-advantaged account, I suppose the Fidelity funds are fine. I'm curious to hear tanderson92's answer, though.
      - scarface74 8y ago
        Not parent, but I wouldn't use these funds because there's a fundamental conflict of interest. Fidelity is a private company that seeks to profit from its customers. Vanguard is a company owned by its customers There is always a profit motive. The company itself may be customer owned but the employees are still trying to make money. I’m not saying that it’s wrong. It just is.
        tanderson92 8y ago
        It is true, but I think it's reasonable to suspect that principal-agent problems are less of a concern when you have non-collaborating individuals trying to extract money from an institution which doesn't structurally have a principal-agent problem than in the situation where the corporation itself poses a principal-agent problem with respect to its customers.
- xur17 8y ago
  Vanguard's expense ration for VTSAX is listed as 0.04% - is this income realized in this fee, or is it realized separately via the fund's performance?
  - whitepoplar 8y ago
    No, it isn't realized in the expense ratio.
tanderson92 8y ago
Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself, so no, that isn't the way they (claim, anyway) will make money. > "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out." --Fidelity August 1, 2018 However, their securities lending practice is significantly less efficient than Vanguard: their total stock market index fund returned only 40% of securities lending revenue to the fund while Vanguard returned 94%. The difference there is in broker rebates -- how much of the interest on loan collateral posted by the borrower goes back to the borrower. For some reason Vanguard seems to be doing a much better job on this (possibly Fidelity is much more aggressive in loaning out shares so receives less benefit).
- whitepoplar 8y ago
  > Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself. Cool, I didn't know this. Do you have a link?
  - tanderson92 8y ago
    Here: http://www.investmentnews.com/article/20180801/FREE/180809994/fidelity-resets-the-fee-war-bar-with-zero-expense-index-funds http://www.investmentnews.com/article/20180801/FREE/18080999...

howeyc 8y ago

I think you're close. I believe they loan shares to short sellers. Selling short calls would leave them open to the risk of shares being called away and would be an entirely different fund. You can buy ETFs that do this, some distribute the premium and others roll it into the fund's cash.

whitepoplar 8y ago

Almost all index funds participate in share lending. Vanguard does, and almost 100% of income is returned to shareholders. Blackrock's iShares does this too, and Blackrock keeps ~20-30%. As far as I know, Vanguard's expense ratio for their total market fund (VSTAX) is effectively 0% after income from share lending.

evrydayhustling 8y ago
This, exactly. It's worth noting that this is one of a few income streams that take advantage of retail investor appetites -- another is when when retail brokers who do "smart routing" of orders lease a feed with advance look at those orders to HFT firms. That kind of income is generally NOT returned to investors, and at some retail brokerages can make up 80% of profits. It's true that if something is free you are the product... but even when you're paying you may be getting sold on the side.
tanderson92 8y ago
> and Blackrock keeps ~half. This is untrue. Per iShares(https://www.ishares.com/us/literature/brochure/securities-lending-unlocking-portfolios-en-us.pdf https://www.ishares.com/us/literature/brochure/securities-le...): > Q: How much of the securities lending proceeds are paid to iShares ETFs? > A:. iShares ETFs receive 71.5-80% of the income generated from securities lending depending on the asset class held. For example, iShares ETFs that predominantly hold US equities receive 71.5% of the income from securities lending. All other funds (i.e., fund-of-funds and funds that invest predominantly in fixed income or international equities) receive 80% of the income from securities lending. Once the aggregate securities lending income exceeds a certain income threshold amount, each iShares ETF will receive an increased percentage of the income above original levels, i.e. from 71.5% to 75% for US equity iShares and from 80% to 85% for all other iShares, for the remainder of that calendar year. By the way, Fidelity isn't making money off of securities lending on these funds, or at least has pledged not to. I still wouldn't use the funds, though.
- whitepoplar 8y ago
  Thanks for the correction. Fixed.
- p10_user 8y ago
  Curious, why wouldn’t you use these funds? Do you still prefer ishares or vanguard?
  - whitepoplar 8y ago
    Not parent, but I wouldn't use these funds because there's a fundamental conflict of interest. Fidelity is a private company that seeks to profit from its customers. Vanguard is a company owned by its customers. What happens in the future if passive indexing falls out of favor, there's an exodus out of index funds, and Fidelity jacks up fees? If you're investing in a taxable account, you'd (presumably) incur a capital gain to leave the fund. At Vanguard, expenses may increase, but they won't seek to profit off of you. In a tax-advantaged account, I suppose the Fidelity funds are fine. I'm curious to hear tanderson92's answer, though.
    - scarface74 8y ago
      Not parent, but I wouldn't use these funds because there's a fundamental conflict of interest. Fidelity is a private company that seeks to profit from its customers. Vanguard is a company owned by its customers There is always a profit motive. The company itself may be customer owned but the employees are still trying to make money. I’m not saying that it’s wrong. It just is.
      - tanderson92 8y ago
        It is true, but I think it's reasonable to suspect that principal-agent problems are less of a concern when you have non-collaborating individuals trying to extract money from an institution which doesn't structurally have a principal-agent problem than in the situation where the corporation itself poses a principal-agent problem with respect to its customers.
xur17 8y ago
Vanguard's expense ration for VTSAX is listed as 0.04% - is this income realized in this fee, or is it realized separately via the fund's performance?
- whitepoplar 8y ago
  No, it isn't realized in the expense ratio.

tanderson92 8y ago

Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself, so no, that isn't the way they (claim, anyway) will make money. > "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out." --Fidelity August 1, 2018 However, their securities lending practice is significantly less efficient than Vanguard: their total stock market index fund returned only 40% of securities lending revenue to the fund while Vanguard returned 94%. The difference there is in broker rebates -- how much of the interest on loan collateral posted by the borrower goes back to the borrower. For some reason Vanguard seems to be doing a much better job on this (possibly Fidelity is much more aggressive in loaning out shares so receives less benefit).

whitepoplar 8y ago
> Fidelity has pledged that all securities revenue will return to the fund and not Fidelity itself. Cool, I didn't know this. Do you have a link?
- tanderson92 8y ago
  Here: http://www.investmentnews.com/article/20180801/FREE/180809994/fidelity-resets-the-fee-war-bar-with-zero-expense-index-funds http://www.investmentnews.com/article/20180801/FREE/18080999...