The high level of computerisation and the liquidity-induced reduction of bid/ask spreads has slashed the cost of investing to an extremely low level. There isn’t a venue in the world, in my opinion that offers a greater chance for investors to compound wealth if done so in a prudent and judicious manner. One of the most efficient ways to invest these days is through Exchange Traded Funds (“ETFs”). Some funds actually let you invest in small caps for free!

The secret is securities lending. Many small cap funds lend out their shares to short sellers (investors who borrow shares and bet they will fall in price) for a fee. This income generated by the ETFs can actually be used to offset expenses, and in the three examples in the table below, actually bring the annual management fee to negative — you are getting paid to hold it in a sense.

For example, according to William Baldwin at Forbes, investors in BlackRock’s iShares Russell 2000 Growth ETF picked up $15.5 million in securities lending revenue in the fund’s most recent fiscal year. That was 0.35 percent of average assets, more than covering BlackRock’s $9.9 million or 0.25% fee for operating the index fund.

Holders of more volatile and speculative names, like Twitter for example, tend to charge much higher lending rates, sometimes in the high single digits annualised. This anomaly doesn’t tend to hold with large cap stocks or bonds where demand for shorting is only modest and the supply is large.

An obvious aspect to mention: You should not be buying small cap funds simply because they have no management expense charge. The reason why you should be buying small caps is if it’s part of your financial plan. Fees should never be the paramount deciding factor of allocating funds. If I told you that you would be charged only one percent for the privilege of losing 20 percent you would be penny wise and pound-foolish simply looking at the annual fee. Always consult with your financial advisor.

If you want to index into small caps, however, the efficient way seems to be buying a fund that charges you nothing.

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd (www.anchor.bm). The views expressed are his own.

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.