Gyroscopic Investing

whatchamacallit wrote: ↑Wed Aug 01, 2018 1:40 pm https://www-cnbc-com.cdn.ampproject.org ... -fund.html

Ah, very nice. Thanks for posting that!

Makes you wonder about counter party risk. How much more does Fidelity lend out stock vs vanguard?

I'm not sure the correct wording of this...but there is no counter party risk. However, there is flat out fraud risk. Stock lending is like the bank and your mortgage. You don't pay the loan, they get your house...and in this case, you simply get your stock back.

The main thing to pay attention to is how are the returns from stock lending being reimbursed back to the shareholders. As nominal interest rates go up I would not be in the least bit surprised to see funds have negative fees. Not likely, but it wouldn't surprise me either.

whatchamacallit wrote: ↑Wed Aug 01, 2018 2:20 pm Makes you wonder about counter party risk. How much more does Fidelity lend out stock vs vanguard?

It's virtually impossible to find an index fund these days that does not engage in securities lending behind the scenes. I don't have data on this, but I suspect the amount of lending is about the same between companies.

Their marketing teams have different ways of justifying it, but AFAIK it's all pretty much the same. Vanguard claims they refund all net proceeds to fund holders, but they generally skim over the part where they first take their cut of fees out of the gross profits. DFA claims they do it so that they can keep fees lower than they would otherwise be. If anything, I read this as Fidelity being honest that they're making money behind the scenes and don't need to always charge an ER on top of that. So even though I don't particularly care for securities lending, I recognize that it's a fact of investing life and I appreciate Fidelity for using the opportunity to eliminate the ER.

I don't think the practice is a bad one. It enables a larger measure of shorting on specific stocks which is helpful for price discovery and the actual owners of the stock are compensated for holding the assets they have. I don't think anyone would be conceptually opposed to equipment rental companies that enable people for a small fee to use equipment for a short term purpose...

Kbg wrote: ↑Thu Aug 02, 2018 8:44 am I don't think anyone would be conceptually opposed to equipment rental companies that enable people for a small fee to use equipment for a short term purpose...

While securities lending has its place in the market, a more appropriate comparison would be for car dealers to rent out the primary vehicle you purchased in cash to other drivers for their own short term purposes while providing zero opportunity for you to opt out of the arrangement.

If we are going to get technical...the more appropriate analogy is a vacation condo time share. You own fund shares, the fund owns the underlying stocks.

In any event, I don’t want to get or sound negative. My main point is the risk is not in the practice of stock lending but rather the intermediary keeping the records of who owns what.

Fair enough. I do agree that the overall risk of securities lending is quite low with reputable brokers due to the cash collateral and the way it’s tracked.

Now, if they can just figure out how to convert all of my VTI in a taxable account to this new fund without paying any capital gains tax, I'm all in.

Will definitely consider it in my tax-deferred accounts when re-balance time arrives next year.

Very timely. I have new accounts at Fidelity which just went live.

ochotona wrote: ↑Thu Aug 02, 2018 5:58 pm Very timely. I have new accounts at Fidelity which just went live.

I just checked and both FUSVX and FSTVX (Fido S&P index and Fido TSM index respectively) are both now sporting an expense ratio of .015%. So it costs $1.50 per $10,000 per year to park money in those funds.

So, Fidelity dropped minimum purchase requirement and reduced the expense ratios to the same value for both Premium and Investor versions of their index funds. Would it not be logical to merge Premium and Investor funds now that there is no difference between them?

Also, now that FZROX is open for investing it's unclear how a non-zero ER for FSTMX and FSTVX can be justified.

Fidelity surely stepped up their competition with Vanguard in a big way. Now all Fido index funds are cheaper than Vanguard Admiral shares, the same is true for the sector ETFs:

https://www.fidelity.com/mutual-funds/i ... ndex-funds

I pushed some extra cash at Fidelity into the no-fee mutual fund, rather than just having it sit there uninvested.