Index mutual funds have become synonymous with low-cost investing, promising investors market returns with minimal fees. For small investors, the appeal of these funds lies in their low expense ratios, which can be a fraction of the fees charged by actively managed funds. For example, the Vanguard 500 Index Fund Admiral Shares (VFIAX) boasts an expense ratio of just 0.04%, and the Fidelity ZERO Total Market Index Fund (FZROX) even offers a 0.00% expense ratio. While these figures are enticing, they don’t tell the whole story. The truth is that fund companies often make money through other channels, and there are additional costs borne by investors that aren’t immediately apparent. How Fund Companies Make Money off Your Assets 1. Securities Lending One significant source of revenue for fund companies is securities lending. This involves lending out the securities held in the fund’s portfolio to short sellers and other market participants in exchange for a fee. While this can generate income for the fund it also introduces additional risks. If a borrower defaults, the fund could suffer losses, which would impact the investors. Example: In 2020