Market Pulse: Who is making money with your cash?
March 7, 2019
Now that short-term interest rates are on the rise yields on money-market funds are moving up as well.
They used to pay close to nothing, now the three-month Treasury bill yields 2.4 percent and the funds are near that level as well.
Cash is no longer trash. Long-suffering individual investors earning almost nothing for years are looking forward to reaping the rewards in their money-market funds. Not so fast.
For many years the incoming cash in brokerage firm accounts was "swept" into whichever money-market fund a client chose. Dividends, interest, deposits and proceeds from stock and fund sales were all swept. A convenient arrangement that worked well for years.
Then brokerage firms had a better idea, at least better for them. They could sweep a client's incoming cash (and in some cases the entire balance) into a deposit account at a bank they own and pay very little interest on it (now 0.3 percent). Their cost of funds would remain rock bottom while interest rates on short-term vehicles rise.
What could be better? Merrill Lynch, Morgan Stanley, Charles Schwab, Ameritrade and others have gone this route. Vanguard and Fidelity have not.
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These firms will say that the advantage of the bank sweep accounts is that they are insured by the Federal Deposit Insurance Corp. But money-market funds are very safe, and some invest only in government securities.
The 2008 financial crisis played a role in this change. During the financial crisis brokerages kept money-market fund shares at $1 since assets barely fluctuated. The risk of having to "break the buck" under severe conditions is something they didn't expect and don't want to take on.
Not all is lost. At some firms that now only sweep cash to a bank they own clients can "purchase" one of several money-market funds as they would buy any security. At Schwab there is no commission to do so. If any firm charges to purchase a money-market fund their commission must be very small, a token. Ask your firm.
Another route is to buy the SPDR 1-3 Month T-Bill ETF (BIL). It is, in effect, a money market fund that yields 2.2 percent. You will have to pay a brokerage commission, which should be about $5.
If you keep a significant amount in cash, the difference between 0.3 percent and 2.3 percent or more is meaningful. It's your cash. You, not your broker, should earn a good rate.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.