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

Indeed, there is much to dislike about the big investment banks. Some of my friends in the industry were appalled at the way I portrayed them in my New York Times best-seller The Gone Fishin’ Portfolio.

“Man, I thought your portrayal was really harsh,” one broker told me.

“Really?” I said. “What did you think was inaccurate?”

[ad#Google Adsense 336×280-IA]”Oh, it was accurate,” he replied. “I just thought it was harsh.”

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.

U.S. 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 two. 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, that 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.

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.

Good investing,



Source: Investment U