Why would Vanguard offer VMFXX (gov't) at a 0.30% yield and Fidelity's best gov't fund is FDRXX at .11%? Three times the difference. Why doesn't Fido have a competitive offering in the gov't space? I need to change my brokerage MM to a gov't option or ultra short CD soon to avoid the pitfalls of the new law. People are saying there is a bank account option in some brokerage accounts. Do they mean CD's? If not, what bank account options do they mean?
Comments
- VMFXX: 0.30% + 0.11% (ER) = 0.41%
- FDRXX: 0.11% + 0.37% (ER) = 0.48%
Note that Fidelity has a higher yielding government MMF available at the retail level ($500 min in IRAs): FZCXX, yielding 0.14%. Fidelity does have competitive funds - FDRXX shows up in the top ten retail government MMFs. Vanguard is the outlier.
http://www.imoneynet.com/retail-money-funds/government-retail.aspx Ultra-short bond funds still have one of the "pitfalls" of some of the new MMFs - a floating NAV.
What pitfall are you trying to avoid, and what's your risk tolerance? The fact that you've been using MMFs says that you've been willing to accept the possibility of losing money, perhaps because you felt the risk of breaking a buck was sufficiently low that you'd take that gamble rather than keep money in an insured bank account.
The new MMF rules are designed to reduce that risk further. But if we have another 2008, you might have to wait a couple of weeks to get your cash if it's not in a government MMF. Do you need faster access to all your cash, or can you accept that risk with some portion of your money? They mean using a bank account as your transaction/core account, which is where cash awaiting investment is kept for you in a brokerage. That transaction account can be structured one of three ways (not all of which are available for all accounts at all brokerages):
- cash account (the brokerage holds your money and may or may not pay you interest; if the brokerage goes bust, you stand in line with its other creditors)
- MMF (your brokerage "checking" account is a government MMF that has a remote possibility of breaking a buck)
- Bank sweep (money is moved automatically between one or more bank checking accounts and your brokerage account so that it "feels" like your transaction account really is the bank checking account)
Scottrade does a pretty good job of describing how a bank sweep account in general, and theirs in particular works. Here's itsdisclosure statement as well.Similarly, here's Fidelity's description of its bank sweep feature (note that Fidelity only makes this available on CMA, IRA, and HSA accounts), and its disclosure statement.
AFAIK, Vanguard does not provide a bank sweep option.
Regards,
Ted
5 Things Investors Should Know About New Rules on Money-Market Funds:
https://www.google.com/#q=5+Things+Investors+Should+Know+About+New+Rules+on+Money-Market+Funds+wsj
Regards,
Ted
I have heard some comment on the possibility of negative rates in brokerage MM's because of the quick huge flow of funds away from prime into gov't over the last 6 months. You pay the brokerage firm. 3 month CD's will be an option if that happens or perhaps just cash account although I risk getting becoming a creditor as msf points out.
Of course all the choices lose money on a real return basis. So IMHO the question ought to be what gives the best albeit negative real return, post tax, after including risk and convenience considerations? Different people are concerned with different risks and weight convenience factors differently, so the selections made by different people can be radically different yet all reasonable.
IMHO you're never going to see a negative nominal rate in a MMF, because funds waive expenses to ensure yields of at least 0.01%. See, e.g. Fidelity Treasury Only MMF (FDLXX), which would be yielding -0.06% but for a voluntary fee waiver that "may be discontinued at any time."
Unless you have over $250K in all FDIC-insured bank accounts combined, insurance limits are a non-issue. If you do, then so long as you don't have more than $250K in a single bank, you're still okay. If you've got more than that in a single bank, kudos, and I can go into the different types of accounts (because each type of account has a separate limit of at least $250K).
Scottrade is pretty clear about how the money is held. Section 4 of its disclosure says that the first $247,500 will go into one Program Bank (see here for list of banks), the next $247,500 will go into a second Program Bank, and any remainder (without limit) will go into Scottrade Bank. Choice of banks they use (from the list) is at their discretion, though they'll tell you where your money is.
The money is held in a combination of a NOW account and a money market (bank) deposit account (not MMF) at each bank. While it is true that MMDAs are restricted to six withdrawals per month, Scottrade will manage the accounts so that no money is ever trapped in the MMDA. The only other restriction comes from Banking Reg D that says that the bank has the right to require seven days notice before honoring a withdrawal.
I don't know of any instance where this has been invoked, but there's certainly enough confusion about the rule (including the fact that most people don't even know it exists). See, e.g. Citibank 2010: http://www.businessinsider.com/citigroup-warns-customers-it-may-refuse-to-allow-withdrawals-2010-2
Being aware seems to be the bottom line. It is unlikely that any of these rules will be triggered, and MMFs are now publishing their maturity distributions (e.g. FZDXX has 42% of its assets maturing in a week or less, well above the 30% threshold that might trigger redemption restrictions).
The new rules, which don’t go into effect until the fall of 2016, separate money-market mutual funds into two distinct groups: retail-money market funds, which will be allowed to keep the long-standing $1 per share value and institutional prime money market funds, which will have a floating net-asset value (NAV) that would fluctuate based on the under market-based value of fund assets. In other words, these funds can break a buck. All three of your MMF are retail, relax
Regards,
Ted
Regards,
Ted
1. Government - fixed NAV, open to institutions as well as retail customers
2. Retail non-government - fixed NAV, closed to institutions, redemption gates
3. Institutional non-government - floating NAV, open to institutions, redemption gates
The reason why there are three groups instead of four (given that there are two ways of partitioning) is that for government funds, there's no difference between a government retail fund and a government institutional fund.
Redemption gates may be redemption fees and/or holds of up to 10 business days on redemptions. They may be imposed once the percentage of a fund's portfolio maturing in a week or less drops below 30%. They must be imposed once that drops below 10%, unless the fund's board feels it is not in the best interest of the shareholders. A minor distinction, amounting to the board opting in to a gate at 30% and the board opting out at 10%.
@VintageFreak 's funds fall into categories 1 (FDRXX) and 2 (VMMXX, PRRXX). So their NAV will not fluctuate on a daily basis. But they, like all MMFs are still subject to the risk of breaking a buck. The new rules make that less likely to happen, but still possible.
If one wants maximum safety, investing rules of thumb haven't changed - buy a Treasury fund. Anything else, even other government paper, has more risk. At Fidelity, that's FDLXX, Fidelity Treasury Only Money Market Fund. It is, as Fidelity writes "For investors seeking more conservative funds with potentially lower yields" than FDRXX.
Prime funds in category (2), like VMMXX, will have a fixed NAV but could be subject to redemption fees. So while technically you wouldn't lose value, you still might not get 100 cents back on your dollar due to the redemption fee. Vanguard writes: "We expect to be able to manage our funds without fees and gates."
I'm inclined to believe them (especially Vanguard which usually manages all its fixed income funds conservatively). But this redemption fee/liquidity risk is still something one needs to evaluate for oneself.
Meanwhile, I have what's called Investor High Yield Checking account at Schwab Bank. No fees, no minimum, and it pays 0.06% interest. That has become my new MM fund in a way.
You're getting a better yield than you would if you had Schwab automatically sweep the money into the bank with its "Bank Sweep" feature (as I described above for Scottrade and Fidelity). If Schwab does the sweep for you, it pays only 0.01%. You need a customer login to see that current rate, but the information is here.
On the other hand, if you can limit yourself to six withdrawals per month, Schwab Bank's High Yield Savings is yielding nearly double: 0.10%. For all the good 4 basis points will do you
Note that with both Schwab Bank accounts (checking and savings), the bank could delay your withdrawal. This is pretty standard, though people tend not to read the fine print. Banking and new MMF rules are somewhat closer together than people think.
Specifically, from Schwab Bank's disclosure:
"Notice of Withdrawal: Federal regulations require us to retain the right to require all savings, money market deposit and interest-bearing checking account depositors to give seven days’ written notice before making a withdrawal. It is unlikely, how ever, that we would require this notice."
Similar to Vanguard's statement on prime funds: "We expect to be able to manage our funds without fees and gates."
This scratching around for an extra quarter or half percent on cash strikes me as pretty pointless (that's unless you got a whole lot of cash like Warren Buffett maybe).
Face the fiddler. Cash yields near nothing at present. We keep a small chunk in Price's Prime Reserve / Government Money Market fund and in a credit union checking account. It's damned convenient - but yields virtually nothing. To alleviate feelings of guilt, every year we toss into that cash a few hundred dollars from our everyday budget and call it "interest" paid to ourselves.
If I were keeping money in a TRP MMF, I'd probably also stick with PRRXX (yielding 0.01% after waivers). All of TRP's MMFs (except possibly ones not open to individuals) are yielding 0.01% after waivers, except for Cash Reserves, TSCXX, which is yielding 0.02%.
Each of the various types of cash investments can serve a useful function depending on what matters to you: principal risk, liquidity risk, convenience, yield.
- CDs help yield (albeit not as much as a bank savings account unless they're mulit-year) and security, but at a risk of convenience, and significant loss of liquidity.
- Government MMFs preserve liquidity and convenience. While they reduce risk, they don't reduce risk to the level of Treasury MMFs or FDIC-insured bank accounts. And they come close to worst for yield (Treasury funds being slightly worse).
- Prime MMFs preserve convenience. They help yield, but not as much as bank accounts. They have a modest liquidity risk - in times of stress, they may freeze withdrawals and/or impose redemption fees for a limited time. They also have the highest risk of loss, though the point of the new rules is to bring that risk down. In addition, deep pocketed sponsors like TRP have in the past propped up NAVs; it's only been Reserve Fund with no reserve funds available, that failed to do so.
- Bank sweep accounts preserve convenience and safety. They may have an iota of liquidity risk (banks generally reserve the right to hold withdrawals for seven days). But they generally tie government MMFs for lowest yields.
- External bank accounts preserve safety but with loss of convenience (a couple of days for ACH transfers to clear). Like sweep accounts, they have a very small liquidity risk. They will tend to provide the highest yields (if you shop around for best banks).
If one factor is paramount, pick the best matched option. But make sure that one attribute really is critical, and don't lose sight of the other factors. One may often achieve one's objectives by splitting money across multiple cash vehicles.