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Kevin Scott

The 2019 guide to investing in emerging markets

The 2019 guide to investing in emerging markets

This might be hard to believe considering the proliferation of free trades today. However, running a brokerage house—e.g. buying, holding and selling securities for customers and doing accounting on that—costs money.

Because of this reality, things that are “free-to-trade” are never truly free. Somebody has to pay for it, and I think people like to imagine that brokerage houses are willingly taking a hit by giving you free trades. What you may not realize, is the person paying for it is often still you.

Backdoor Payola

To explain how this works, let’s pretend I want to start my own ETF. Something really trendy and stupid, to appeal to retail investors.Marijuana and blockchain are both hot topics right now, so let’s build an equal-weight index of companies related to both marijuana AND blockchain. We’ll call it the Capital Minded Off The Chain ETF, and obviously give it the ticker symbol of DANK.

So. Once we get beyond that killer name (which I’m sure is worth $30m in assets alone), how in the world do I get people to put their money in DANK? There’s all sorts of regulation around mass advertising of securities, and regulations are super annoying.

So a friend gives me a tip. Apparently, funds on free-to-trade lists at brokers are far more likely to attract assets. He says investors often list “free trades” as their number one concern when choosing investments—which is quite irrational. Sounds like just the kind of customer who would invest in something called DANK.

So I call up a big brokerage house:

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Kevin Scott

Why insert tech stock moved today

Why insert tech stock moved today

This might be hard to believe considering the proliferation of free trades today. However, running a brokerage house—e.g. buying, holding and selling securities for customers and doing accounting on that—costs money.

Because of this reality, things that are “free-to-trade” are never truly free. Somebody has to pay for it, and I think people like to imagine that brokerage houses are willingly taking a hit by giving you free trades. What you may not realize, is the person paying for it is often still you.

Backdoor Payola

To explain how this works, let’s pretend I want to start my own ETF. Something really trendy and stupid, to appeal to retail investors.Marijuana and blockchain are both hot topics right now, so let’s build an equal-weight index of companies related to both marijuana AND blockchain. We’ll call it the Capital Minded Off The Chain ETF, and obviously give it the ticker symbol of DANK.

So. Once we get beyond that killer name (which I’m sure is worth $30m in assets alone), how in the world do I get people to put their money in DANK? There’s all sorts of regulation around mass advertising of securities, and regulations are super annoying.

So a friend gives me a tip. Apparently, funds on free-to-trade lists at brokers are far more likely to attract assets. He says investors often list “free trades” as their number one concern when choosing investments—which is quite irrational. Sounds like just the kind of customer who would invest in something called DANK.

So I call up a big brokerage house:

Me: “Hey! How can I get DANK on your free-to-trade list?”

Broker: “Easy, just raise the expense ratio of DANK by 0.4%, and give that extra money back to us every year!”

Me: “Wait, don’t you want to know if DANK is even a good product?”

Broker: “Who cares bro! I’m not in the make customers rich business, I’m in the make me rich business!”

And that’s literally how it’s worked at many brokers for years. The broker tricks his customers into thinking he’s doing them a solid: “This trade would cost $6 elsewhere, but here it’s free!

Behind the scenes, the broker is getting kickbacks of 0.4% of every dollar his customer puts in DANK, on a yearly basis. Which, over the customers lifetime, can compound to 500X more than $6.

The customer either mistakenly assumes the extra 0.4% is what it costs to run DANK properly…or flat out doesn’t understand the complicated concept of expense ratio compounding vs. saving $6 right now.

Charles Schwab Form 10-Q
Charles Schwab Form 10-Q


Enter Vanguard
So one of the ways Vanguard has notoriously kept costs so low (aside from being structured as somewhat of a hippie commune and fiduciary wet dream—Vanguard is owned by its customers) is by refusing to participate in this shady pay-to-play I just described.

As you can imagine, this pisses brokers off. Vanguard has one of the strongest brands in investing, so brokers feel they have to offer Vanguard funds. But brokers don’t make money off the payola racket when a customer buys Vanguard funds. And the number of customers buying them is growing rapidly—threatening the profitability of the game.

In 2017 there was a revolt. TD Ameritrade took Vanguard ETFs off of their free trade list. Morgan Stanley announced they would flat-out refuse to buy Vanguard funds for customers. Other brokers charged higher fees to buy Vanguard funds vs. other funds.


Vanguard finally retaliated last week
Revenge is a dish best served cold…and in the form of a press release 1 year later.

Last week Vanguard dropped the mic by announcing that pretty much all ETFs (not just their own) will now trade for free on their brokerage platform starting in August. Effectively disintermediating all of the proprietary pay-to-play deals other brokers have cut.

And while this is definitely going to save you on trading fees, it’s potentially going to have even more of a dramatic effect in lowering fund expense ratios throughout the industry.

For example, fund providers like me don’t need to raise the expense ratios of my ETFs any more to pay off brokers. Vanguard’s brokerage platform will become even more of a default choice for consumers than it already is, and I can sell my product there for free.


Finally, a story where the good guy wins.
(Minus the part where I still get to sell you a stupid marijuana-blockchain ETF)

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Kevin Scott

Free Trades? Buyer Beware

Free Trades? Buyer Beware

This might be hard to believe considering the proliferation of free trades today. However, running a brokerage house—e.g. buying, holding and selling securities for customers and doing accounting on that—costs money.

Because of this reality, things that are “free-to-trade” are never truly free. Somebody has to pay for it, and I think people like to imagine that brokerage houses are willingly taking a hit by giving you free trades. What you may not realize, is the person paying for it is often still you.

Backdoor Payola

To explain how this works, let’s pretend I want to start my own ETF. Something really trendy and stupid, to appeal to retail investors.Marijuana and blockchain are both hot topics right now, so let’s build an equal-weight index of companies related to both marijuana AND blockchain. We’ll call it the Capital Minded Off The Chain ETF, and obviously give it the ticker symbol of DANK.

So. Once we get beyond that killer name (which I’m sure is worth $30m in assets alone), how in the world do I get people to put their money in DANK? There’s all sorts of regulation around mass advertising of securities, and regulations are super annoying.

So a friend gives me a tip. Apparently, funds on free-to-trade lists at brokers are far more likely to attract assets. He says investors often list “free trades” as their number one concern when choosing investments—which is quite irrational. Sounds like just the kind of customer who would invest in something called DANK.

So I call up a big brokerage house:

Me: “Hey! How can I get DANK on your free-to-trade list?”

Broker: “Easy, just raise the expense ratio of DANK by 0.4%, and give that extra money back to us every year!”

Me: “Wait, don’t you want to know if DANK is even a good product?”

Broker: “Who cares bro! I’m not in the make customers rich business, I’m in the make me rich business!”

And that’s literally how it’s worked at many brokers for years. The broker tricks his customers into thinking he’s doing them a solid: “This trade would cost $6 elsewhere, but here it’s free!

Behind the scenes, the broker is getting kickbacks of 0.4% of every dollar his customer puts in DANK, on a yearly basis. Which, over the customers lifetime, can compound to 500X more than $6.

The customer either mistakenly assumes the extra 0.4% is what it costs to run DANK properly…or flat out doesn’t understand the complicated concept of expense ratio compounding vs. saving $6 right now.

Charles Schwab Form 10-Q
Charles Schwab Form 10-Q


Enter Vanguard
So one of the ways Vanguard has notoriously kept costs so low (aside from being structured as somewhat of a hippie commune and fiduciary wet dream—Vanguard is owned by its customers) is by refusing to participate in this shady pay-to-play I just described.

As you can imagine, this pisses brokers off. Vanguard has one of the strongest brands in investing, so brokers feel they have to offer Vanguard funds. But brokers don’t make money off the payola racket when a customer buys Vanguard funds. And the number of customers buying them is growing rapidly—threatening the profitability of the game.

In 2017 there was a revolt. TD Ameritrade took Vanguard ETFs off of their free trade list. Morgan Stanley announced they would flat-out refuse to buy Vanguard funds for customers. Other brokers charged higher fees to buy Vanguard funds vs. other funds.


Vanguard finally retaliated last week
Revenge is a dish best served cold…and in the form of a press release 1 year later.

Last week Vanguard dropped the mic by announcing that pretty much all ETFs (not just their own) will now trade for free on their brokerage platform starting in August. Effectively disintermediating all of the proprietary pay-to-play deals other brokers have cut.

And while this is definitely going to save you on trading fees, it’s potentially going to have even more of a dramatic effect in lowering fund expense ratios throughout the industry.

For example, fund providers like me don’t need to raise the expense ratios of my ETFs any more to pay off brokers. Vanguard’s brokerage platform will become even more of a default choice for consumers than it already is, and I can sell my product there for free.


Finally, a story where the good guy wins.
(Minus the part where I still get to sell you a stupid marijuana-blockchain ETF)

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Kevin Scott

Technical analysis is bullshit

Technical analysis is bullshit

This might be hard to believe considering the proliferation of free trades today. However, running a brokerage house—e.g. buying, holding and selling securities for customers and doing accounting on that—costs money.

Because of this reality, things that are “free-to-trade” are never truly free. Somebody has to pay for it, and I think people like to imagine that brokerage houses are willingly taking a hit by giving you free trades. What you may not realize, is the person paying for it is often still you.

Backdoor Payola

To explain how this works, let’s pretend I want to start my own ETF. Something really trendy and stupid, to appeal to retail investors.Marijuana and blockchain are both hot topics right now, so let’s build an equal-weight index of companies related to both marijuana AND blockchain. We’ll call it the Capital Minded Off The Chain ETF, and obviously give it the ticker symbol of DANK.

So. Once we get beyond that killer name (which I’m sure is worth $30m in assets alone), how in the world do I get people to put their money in DANK? There’s all sorts of regulation around mass advertising of securities, and regulations are super annoying.

So a friend gives me a tip. Apparently, funds on free-to-trade lists at brokers are far more likely to attract assets. He says investors often list “free trades” as their number one concern when choosing investments—which is quite irrational. Sounds like just the kind of customer who would invest in something called DANK.

So I call up a big brokerage house:

Me: “Hey! How can I get DANK on your free-to-trade list?”

Broker: “Easy, just raise the expense ratio of DANK by 0.4%, and give that extra money back to us every year!”

Me: “Wait, don’t you want to know if DANK is even a good product?”

Broker: “Who cares bro! I’m not in the make customers rich business, I’m in the make me rich business!”

And that’s literally how it’s worked at many brokers for years. The broker tricks his customers into thinking he’s doing them a solid: “This trade would cost $6 elsewhere, but here it’s free!

Behind the scenes, the broker is getting kickbacks of 0.4% of every dollar his customer puts in DANK, on a yearly basis. Which, over the customers lifetime, can compound to 500X more than $6.

The customer either mistakenly assumes the extra 0.4% is what it costs to run DANK properly…or flat out doesn’t understand the complicated concept of expense ratio compounding vs. saving $6 right now.

Charles Schwab Form 10-Q
Charles Schwab Form 10-Q


Enter Vanguard
So one of the ways Vanguard has notoriously kept costs so low (aside from being structured as somewhat of a hippie commune and fiduciary wet dream—Vanguard is owned by its customers) is by refusing to participate in this shady pay-to-play I just described.

As you can imagine, this pisses brokers off. Vanguard has one of the strongest brands in investing, so brokers feel they have to offer Vanguard funds. But brokers don’t make money off the payola racket when a customer buys Vanguard funds. And the number of customers buying them is growing rapidly—threatening the profitability of the game.

In 2017 there was a revolt. TD Ameritrade took Vanguard ETFs off of their free trade list. Morgan Stanley announced they would flat-out refuse to buy Vanguard funds for customers. Other brokers charged higher fees to buy Vanguard funds vs. other funds.


Vanguard finally retaliated last week
Revenge is a dish best served cold…and in the form of a press release 1 year later.

Last week Vanguard dropped the mic by announcing that pretty much all ETFs (not just their own) will now trade for free on their brokerage platform starting in August. Effectively disintermediating all of the proprietary pay-to-play deals other brokers have cut.

And while this is definitely going to save you on trading fees, it’s potentially going to have even more of a dramatic effect in lowering fund expense ratios throughout the industry.

For example, fund providers like me don’t need to raise the expense ratios of my ETFs any more to pay off brokers. Vanguard’s brokerage platform will become even more of a default choice for consumers than it already is, and I can sell my product there for free.


Finally, a story where the good guy wins.
(Minus the part where I still get to sell you a stupid marijuana-blockchain ETF)

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