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As always, good analysis by Matt Levine: (go down to "How much should an index fund cost?") https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is-a-due-

by mbesto 8y ago

As always, good analysis by Matt Levine: (go down to "How much should an index fund cost?") https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is-a-due-diligence-issue-now https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is... https://www.bloomberg.com/news/articles/2018-08-01/fidelity-to-offer-index-mutual-funds-with-zero-expense-ratio https://www.bloomberg.com/news/articles/2018-08-01/fidelity-...

modeless 8y ago
> You can lend out the fund’s stock to short sellers, and share some of the fees paid by the short sellers with the fund, while keeping some for yourself. Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?
- tanderson92 8y ago
  Why do you say that index funds are supposed to be low risk? That's not really true; they in fact desire to have precisely the risk profile of whatever benchmark they target and seek minimal tracking error relative to that. Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.
  - modeless 8y ago
    Obviously I am talking about the risk inherent to the fund separate from the risk of what it's tracking, which is arbitrary. The inherent risk of the fund is absolutely supposed to be low. Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.
    - tanderson92 8y ago
      I see what you mean. The only thing I would add is that they do credit analysis on who they are lending to, and it's basically just institutional investors not fly-by-night short-sellers.
- SatvikBeri 8y ago
  Lenders make money on a short squeeze. The only time you lose money is if you want to sell and can't because you've loaned out your shares. But with a large index fund, that's extremely unlikely: you can easily lend out a small portion of your shares all the time (say 5%) with virtually no chance that too many customers will want to cash out all at the same time.
  - modeless 8y ago
    Lenders only make money on a short squeeze if the shorts can cover. If they default, the lender loses shares. And if the lender is an index fund that is required to maintain a certain balance of shares then they will have to replace those lost shares, becoming a victim of the short squeeze themselves.
frgtpsswrdlame 8y ago
Hmm. Additional fuel for the price competition has come from a practice in which asset managers loan shares of companies. In exchange, the firms get cash collateral, which they can reinvest for a return to help offset fees associated with index funds and ETFs. “Since we expect Fidelity is a profit making organization, we expect somehow they will look to make money, likely on the sec lending of assets,” said Robert Lee, an analyst at Keefe, Bruyette & Woods, in a note Wednesday. So am I correct in thinking that this probably preempts a move where Fidelity will push short selling and margin trading for single stock selection in their consumer accounts?
mlevental 8y ago
matt levine is a national treasure. he makes the most boring minutiae of finance fun to read and is consistently insightful. even if you're not into finance you should read him for general business culture
nabla9 8y ago
>Again this dynamic is sort of terrible! In a perfect world you’d want clients and banks to develop relationships, to know and trust each other, to build mutually beneficial sequences of repeated interactions rather than just trying to gouge each other in atomistic arm’s-length trades. Why this should be the case? Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins. Only those relatively rare cases where someone can provide value over others the trend is reversed.
- skybrian 8y ago
  I think you'd want access to such a market, but still want your accounts and user interface to be with a brokerage that would tell you whether you're getting a good deal on trades. Of course this could be entirely automated. Having a UI that clearly tells you what's going on and doesn't lie to you or use dark patterns seems pretty basic?
  - nabla9 8y ago
    You can't get good and honest advice from someone whose advice is tied for them making trade with you with a extra markup.
- jonknee 8y ago
  That wasn't related to zero expense ratio index funds, but instead on the foreign exchange derivatives market. Matt's point is that the worst clients get the best pricing and the people you'd normally want to have as clients get the short end of the stick.
  - nabla9 8y ago
    Yes. But the worst client is only worst because he is price aware. The natural development in financial industry with increased automation is to make everyone the worst possible customer for the financial service provider and that's a good thing.
    - 8y ago
kolbe 8y ago
He sort of glossed over how valuable it is for Fidelity (or others) to get to control so many shares for voting purposes.
- jmcgough 8y ago
  How much power have companies like vanguard exercised in this situation? I thought the problem with vanguard was that they didn't care about the outcome of individual companies and so would vote for maintaining the status quo.
- insaneirish 8y ago
  He's written about index funds and voting before: https://www.bloomberg.com/view/articles/2018-01-30/iss-tells-investors-how-they-want-to-vote https://www.bloomberg.com/view/articles/2018-01-30/iss-tells... https://www.bloomberg.com/view/articles/2015-07-22/index-funds-may-work-a-little-too-well https://www.bloomberg.com/view/articles/2015-07-22/index-fun...
fnordsensei 8y ago
Nothing. That's the rate I've had for the last three years. Granted, not in the US.

by mbesto 8y ago

modeless 8y ago

> You can lend out the fund’s stock to short sellers, and share some of the fees paid by the short sellers with the fund, while keeping some for yourself. Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?

tanderson92 8y ago
Why do you say that index funds are supposed to be low risk? That's not really true; they in fact desire to have precisely the risk profile of whatever benchmark they target and seek minimal tracking error relative to that. Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.
- modeless 8y ago
  Obviously I am talking about the risk inherent to the fund separate from the risk of what it's tracking, which is arbitrary. The inherent risk of the fund is absolutely supposed to be low. Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.
  - tanderson92 8y ago
    I see what you mean. The only thing I would add is that they do credit analysis on who they are lending to, and it's basically just institutional investors not fly-by-night short-sellers.
SatvikBeri 8y ago
Lenders make money on a short squeeze. The only time you lose money is if you want to sell and can't because you've loaned out your shares. But with a large index fund, that's extremely unlikely: you can easily lend out a small portion of your shares all the time (say 5%) with virtually no chance that too many customers will want to cash out all at the same time.
- modeless 8y ago
  Lenders only make money on a short squeeze if the shorts can cover. If they default, the lender loses shares. And if the lender is an index fund that is required to maintain a certain balance of shares then they will have to replace those lost shares, becoming a victim of the short squeeze themselves.

frgtpsswrdlame 8y ago

Hmm. Additional fuel for the price competition has come from a practice in which asset managers loan shares of companies. In exchange, the firms get cash collateral, which they can reinvest for a return to help offset fees associated with index funds and ETFs. “Since we expect Fidelity is a profit making organization, we expect somehow they will look to make money, likely on the sec lending of assets,” said Robert Lee, an analyst at Keefe, Bruyette & Woods, in a note Wednesday. So am I correct in thinking that this probably preempts a move where Fidelity will push short selling and margin trading for single stock selection in their consumer accounts?

mlevental 8y ago

matt levine is a national treasure. he makes the most boring minutiae of finance fun to read and is consistently insightful. even if you're not into finance you should read him for general business culture

nabla9 8y ago

>Again this dynamic is sort of terrible! In a perfect world you’d want clients and banks to develop relationships, to know and trust each other, to build mutually beneficial sequences of repeated interactions rather than just trying to gouge each other in atomistic arm’s-length trades. Why this should be the case? Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins. Only those relatively rare cases where someone can provide value over others the trend is reversed.

skybrian 8y ago
I think you'd want access to such a market, but still want your accounts and user interface to be with a brokerage that would tell you whether you're getting a good deal on trades. Of course this could be entirely automated. Having a UI that clearly tells you what's going on and doesn't lie to you or use dark patterns seems pretty basic?
- nabla9 8y ago
  You can't get good and honest advice from someone whose advice is tied for them making trade with you with a extra markup.
jonknee 8y ago
That wasn't related to zero expense ratio index funds, but instead on the foreign exchange derivatives market. Matt's point is that the worst clients get the best pricing and the people you'd normally want to have as clients get the short end of the stick.
- nabla9 8y ago
  Yes. But the worst client is only worst because he is price aware. The natural development in financial industry with increased automation is to make everyone the worst possible customer for the financial service provider and that's a good thing.
  - 8y ago

kolbe 8y ago

He sort of glossed over how valuable it is for Fidelity (or others) to get to control so many shares for voting purposes.

jmcgough 8y ago
How much power have companies like vanguard exercised in this situation? I thought the problem with vanguard was that they didn't care about the outcome of individual companies and so would vote for maintaining the status quo.
insaneirish 8y ago
He's written about index funds and voting before: https://www.bloomberg.com/view/articles/2018-01-30/iss-tells-investors-how-they-want-to-vote https://www.bloomberg.com/view/articles/2018-01-30/iss-tells... https://www.bloomberg.com/view/articles/2015-07-22/index-funds-may-work-a-little-too-well https://www.bloomberg.com/view/articles/2015-07-22/index-fun...

fnordsensei 8y ago

Nothing. That's the rate I've had for the last three years. Granted, not in the US.