Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
For purposes other than same-day trades, I'll stick with VUSXX. Same pre-tax yield (within a basis point), better after-tax yield (100% state tax exempt), and VUSXX is arguably better insured (though I think this is splitting hairs).
Its underlying Treasury securities are backed directly by the Treasury in an unlimited amount. Protection against theft (embezzlement, robbery, etc.) is provided up to $500K by the SIPC. In comparison, the VG sweep program is covered "only" up to $250K by the FDIC, which in turn is backed by the Treasury.
Another petty difference between the VG sweep account (or the MMFs) and bank savings accounts is that the latter are subject to Regulation D. The banks may reserve the right to require seven days notice for withdrawals. And while the six withdrawal per month limit has been suspended, the banks may still impose a limit.
One way in which VUSXX and bank savings accounts are similar is that neither can be used as a settlement account at VBS. You have to move money from a bank or from VUSXX into a brokerage settlement account before you can trade with it. If that's an important feature, compare the Vanguard sweep account to VMFXX.
Federal FDIC related to banks and nonprofit SIPC relates to brokerages.
Confusion arises for brokerage cash, money-market funds, brokered CDs.
To begin with, consider brokerage firm A and financial product B (cash, market fund, CD). Then, the SIPC coverage is at the brokerage firm level (for fraud, failure; total $500K including $250K for brokerage cash) while the FDIC coverage is at product-CD level ($250K).
Case 1 - Firm A is fine, but product-CD fails. The FDIC coverage kicks in (if the issuing bank is covered by FDIC). The SIPC is not involved.
Case 2 - Firm A is fine, but product-money-market fund fails. The SIPC coverage doesn't kick in; the FDIC has no business in this. There has been only one major money-market fund failure - Reserve Primary Fund. Much of the money was recovered after being frozen for several years. That situation was not covered by the SIPC or FDIC. More realistic risks of money-market funds today are not failures, but gates and/or redemption fees (least likely for government money-market funds) but those situations are also not covered by the SIPC or FDIC.
Case 3 - Firm A fails, CD is fine. The FDIC isn't involved. The SIPC coverage kicks in for securities and brokerage cash. The SIPC coverage of $500K would be for the total account value (net equity for margin account) including $250K for brokerage cash.
Case 4 - Firm fails, CD fails, money-market fund fails. A total disaster, may be an economic collapse. In that unlikely and absurd case, the SIPC will cover $500K and the FDIC $250K, for a combined total of $750K, more if the brokerage firm has excess insurance coverage beyond SIPC (most major brokerages do).
Securities are stocks, bonds, money-market funds, Treasuries, CDs, options; excluded are futures, warrants. While we may think of money-market funds as cash equivalents, for the SIPC, they are classified as securities. It goes without saying that there is no FDIC or SIPC coverage for the money-market fund itself, and the SIPC coverage will kick in for the total brokerage account only if the brokerage firm fails.
Brokerage cash is the cash held from securities sales or that waiting only to be deployed for purchases of securities (and for no other purpose). When in 2018, Robinhood foolishly launched an interest-bearing checking account with SIPC coverage, the SIPC rejected that notion immediately and publicly - because that Robinhood money wasn't really waiting to be deployed for security purchases only. Robinhood mistakenly thought that it could stretch the definition of brokerage cash into an interest bearing product (i.e. a banking product without really saying so). The SIPC wasn't amused, nor was the FDIC. An embarrassed Robinhood withdrew that product, and a couple of years later, relaunched a cash management product in partnership with banks with FDIC coverages.
In conclusion, Vanguard Cash Plus savings is a FDIC insured banking product that allows ACH withdrawals (for money transfers to brokerages/banks or bill pay) but there won't be any credit/debit card associated with it at this time. If your brokerage account is linked to an online savings account now, then VG Cash Plus can be a better alternative.
FDIC coverage is at owner level rather than at the product level. If you have a CD and a MMA at the same bank each with $250K (and each with same type of ownership), then if the bank fails you're only covered for $250K. If you have $500K in a MMF at a brokerage and the brokerage fails, then the SIPC will cover any brokerage losses.
Case 1 - Vanguard's Cash Plus' underlying bank fails. You're covered by the FDIC, but only up to $250K. That's total coverage not only for the Cash Plus account but for all other money you might have in the same underlying bank.
You are responsible for monitoring the total assets you hold at each Program Bank for FDIC coverage and limitations. These total assets will include not only Eligible Balances under the Bank Sweep but also any other deposits you may hold at those banks.
Case 2 - Treasury MMF fails. That means that the underlying securities fail, i.e. the Treasury fails. No resemblance to Lehman paper going to zero. A Treasury failure is effectively case 4, a complete financial system meltdown.
While government MMFs can impose gates/fees, they have to explicitly declare this. AFAIK, there isn't a single fund that has done so; certainly not Vanguard's government MMFs.
From Vanguard (click on liquidity gates and fees):
The fees and gates rules only apply to retail and institutional funds, although government funds may voluntarily adopt them if the fees and gates are previously disclosed to investors.
Case 3 - VBS fails. Then securities in the account (including MMF shares) are covered up to $500K.
Case 4 - total financial system meltdown. Not worth too much thought, though I am curious about the mechanics of moving sweep money back through the failed brokerage. There's a fair amount of legerdemain with brokerage sweep accounts, including short periods of time (between daily sweeps) when new cash is held not in an FDIC-insured bank, but by the brokerage. Might the same risk manifest itself in reverse, i.e. might the FDIC "payout" move back through the failed brokerage?
Here's some of what Ken Tumin (DepositAccounts.com) had to say about sweep accounts between brokerages and banks:
SoFi, Aspiration, Betterment and Wealthfront ... define their accounts as either cash management accounts or cash accounts that are considered to be a brokerage product. All ... describe how deposits that have been moved into the program banks are FDIC insured. The coverage that exists while the deposits are in transit into or out of the program banks is complicated. Most state that the funds are covered by SIPC
Regarding Robinhood, consider that brokerages routinely offer interest-bearing checking accounts with SIPC coverage for free credit balances (e.g. E*Trade's CBP account and Fidelity's FCASH). The difference is that they don't loudly promote these accounts as savings vehicles, though they can be used this way.
However, you do so at your own risk. Continuing from Ken's column:
It should be noted that there’s no guarantee that SIPC will cover a cash management account if the SIPC determines that it’s being used for banking purposes. Below is a relevant excerpt from the SIPC FAQs:
I have a securities account. Isn’t everything in my securities account protected by SIPC?
Not necessarily. In general, SIPC protection is determined on an asset-by-asset basis and extends only to: (1) cash in a customer’s account that is on deposit for the purchase of securities; [...]
It's all about marketing. Slap an FDIC label on a service and you'll get more customers. Regardless of whether it is actually safer than T-bills (securities underlying Treasury MMFs). And regardless of whether its after-tax yield is better or worse.
Vanguard Cash Plus savings is a FDIC insured banking product that allows ACH withdrawals (for money transfers to brokerages/banks or bill pay)
More spin. VBS accounts, like the vast majority of brokerage accounts, allow external financial institutions to push and pull money from them. Creditors pull their money from VBS, not directly from the banking product.
Checks, ACH payments, wire transfers, and other transactions and items for Your Account are processed through Your VBS Account rather than directly with any Program Bank under the Bank Sweep. VBS will withdraw Your Sweep Deposits with the Program Banks to satisfy any net debit position in your Account on the Business Day following the debit’s posting.
In all of this, I'm not saying that this is a bad service, just that it is one designed for the purpose of retaining/holding assets as opposed to one providing something of significant additional value. If you linked a VBS account to an online bank account, why? You could have been using VUSXX, whose assets (Treasury obligations) are backed directly by the Treasury, and likely gotten a better return, even before considering VUSXX's tax advantages.
@mfs, you have raised several good points. Thanks.
In future, I will use "product-CD-owner level" instead of "product-CD level" for FDIC coverage.
Money in transit is an interesting point but may be covered by ICS. Note that ICS and CEDRAS services are now part of IntraFi Network. Cashier's checks are also money in transit but are covered by the FDIC. https://www.intrafinetworkdeposits.com/
BTW, those who try to log on to VG Cash Plus pilot program may get this message:
"Enrollment is closed for now, but we'll be in touch
We're sorry you weren't included in the pilot phase of the Vanguard Cash Plus Account. We're in the process of adding clients and will let you know as soon as it's ready for you."
Comments
VG federal money market, VMFXX, 3.61% 7 day SEC yield
VG treasury money market, VMSXX, 3.49%
VG Cash reserve federal money market, VMRXX, 3.64%
All require a minimum $3,000.
https://www.depositaccounts.com/savings/
More on VG Cash Plus from RIABiz,
https://riabiz.com/a/2022/10/6/vanguard-is-now-several-months-into-beta-plan-to-offer-head-turning-high-fdic-insured-yields-and-capacity-after-2019-scrapping-left-it-flat-footed-against-schwab-and-fidelity
https://investor.vanguard.com/accounts-plans/vanguard-cash-plus-account
And participating banks:
https://personal.vanguard.com/pdf/Bank_Sweep_Participating_Banks.pdf
For purposes other than same-day trades, I'll stick with VUSXX. Same pre-tax yield (within a basis point), better after-tax yield (100% state tax exempt), and VUSXX is arguably better insured (though I think this is splitting hairs).
Its underlying Treasury securities are backed directly by the Treasury in an unlimited amount. Protection against theft (embezzlement, robbery, etc.) is provided up to $500K by the SIPC. In comparison, the VG sweep program is covered "only" up to $250K by the FDIC, which in turn is backed by the Treasury.
Another petty difference between the VG sweep account (or the MMFs) and bank savings accounts is that the latter are subject to Regulation D. The banks may reserve the right to require seven days notice for withdrawals. And while the six withdrawal per month limit has been suspended, the banks may still impose a limit.
For example American Express Bank limits savers to nine withdrawals.
https://www.cnn.com/cnn-underscored/reviews/american-express-personal-savings-account
One way in which VUSXX and bank savings accounts are similar is that neither can be used as a settlement account at VBS. You have to move money from a bank or from VUSXX into a brokerage settlement account before you can trade with it. If that's an important feature, compare the Vanguard sweep account to VMFXX.
Federal FDIC related to banks and nonprofit SIPC relates to brokerages.
Confusion arises for brokerage cash, money-market funds, brokered CDs.
To begin with, consider brokerage firm A and financial product B (cash, market fund, CD). Then, the SIPC coverage is at the brokerage firm level (for fraud, failure; total $500K including $250K for brokerage cash) while the FDIC coverage is at product-CD level ($250K).
Case 1 - Firm A is fine, but product-CD fails. The FDIC coverage kicks in (if the issuing bank is covered by FDIC). The SIPC is not involved.
Case 2 - Firm A is fine, but product-money-market fund fails. The SIPC coverage doesn't kick in; the FDIC has no business in this. There has been only one major money-market fund failure - Reserve Primary Fund. Much of the money was recovered after being frozen for several years. That situation was not covered by the SIPC or FDIC. More realistic risks of money-market funds today are not failures, but gates and/or redemption fees (least likely for government money-market funds) but those situations are also not covered by the SIPC or FDIC.
Case 3 - Firm A fails, CD is fine. The FDIC isn't involved. The SIPC coverage kicks in for securities and brokerage cash. The SIPC coverage of $500K would be for the total account value (net equity for margin account) including $250K for brokerage cash.
Case 4 - Firm fails, CD fails, money-market fund fails. A total disaster, may be an economic collapse. In that unlikely and absurd case, the SIPC will cover $500K and the FDIC $250K, for a combined total of $750K, more if the brokerage firm has excess insurance coverage beyond SIPC (most major brokerages do).
Securities are stocks, bonds, money-market funds, Treasuries, CDs, options; excluded are futures, warrants. While we may think of money-market funds as cash equivalents, for the SIPC, they are classified as securities. It goes without saying that there is no FDIC or SIPC coverage for the money-market fund itself, and the SIPC coverage will kick in for the total brokerage account only if the brokerage firm fails.
Brokerage cash is the cash held from securities sales or that waiting only to be deployed for purchases of securities (and for no other purpose). When in 2018, Robinhood foolishly launched an interest-bearing checking account with SIPC coverage, the SIPC rejected that notion immediately and publicly - because that Robinhood money wasn't really waiting to be deployed for security purchases only. Robinhood mistakenly thought that it could stretch the definition of brokerage cash into an interest bearing product (i.e. a banking product without really saying so). The SIPC wasn't amused, nor was the FDIC. An embarrassed Robinhood withdrew that product, and a couple of years later, relaunched a cash management product in partnership with banks with FDIC coverages.
In conclusion, Vanguard Cash Plus savings is a FDIC insured banking product that allows ACH withdrawals (for money transfers to brokerages/banks or bill pay) but there won't be any credit/debit card associated with it at this time. If your brokerage account is linked to an online savings account now, then VG Cash Plus can be a better alternative.
Case 1 - Vanguard's Cash Plus' underlying bank fails. You're covered by the FDIC, but only up to $250K. That's total coverage not only for the Cash Plus account but for all other money you might have in the same underlying bank. https://investor.vanguard.com/accounts-plans/vanguard-cash-plus-account
Case 2 - Treasury MMF fails. That means that the underlying securities fail, i.e. the Treasury fails. No resemblance to Lehman paper going to zero. A Treasury failure is effectively case 4, a complete financial system meltdown.
While government MMFs can impose gates/fees, they have to explicitly declare this. AFAIK, there isn't a single fund that has done so; certainly not Vanguard's government MMFs.
From Vanguard (click on liquidity gates and fees): https://investor.vanguard.com/investor-resources-education/mutual-funds/money-market-reform#modal-understanding-liquidity-fees
Case 3 - VBS fails. Then securities in the account (including MMF shares) are covered up to $500K.
Case 4 - total financial system meltdown. Not worth too much thought, though I am curious about the mechanics of moving sweep money back through the failed brokerage. There's a fair amount of legerdemain with brokerage sweep accounts, including short periods of time (between daily sweeps) when new cash is held not in an FDIC-insured bank, but by the brokerage. Might the same risk manifest itself in reverse, i.e. might the FDIC "payout" move back through the failed brokerage?
Here's some of what Ken Tumin (DepositAccounts.com) had to say about sweep accounts between brokerages and banks:https://www.depositaccounts.com/blog/banking-fintechs-safety-money.html
Regarding Robinhood, consider that brokerages routinely offer interest-bearing checking accounts with SIPC coverage for free credit balances (e.g. E*Trade's CBP account and Fidelity's FCASH). The difference is that they don't loudly promote these accounts as savings vehicles, though they can be used this way.
However, you do so at your own risk. Continuing from Ken's column: It's all about marketing. Slap an FDIC label on a service and you'll get more customers. Regardless of whether it is actually safer than T-bills (securities underlying Treasury MMFs). And regardless of whether its after-tax yield is better or worse. More spin. VBS accounts, like the vast majority of brokerage accounts, allow external financial institutions to push and pull money from them. Creditors pull their money from VBS, not directly from the banking product. Vanguard Cash Deposit Terms of Use
In all of this, I'm not saying that this is a bad service, just that it is one designed for the purpose of retaining/holding assets as opposed to one providing something of significant additional value. If you linked a VBS account to an online bank account, why? You could have been using VUSXX, whose assets (Treasury obligations) are backed directly by the Treasury, and likely gotten a better return, even before considering VUSXX's tax advantages.
Side note: the ticker for Vanguard's Treasury MMF is VUSXX, not VMSXX. VUSXX is yielding 3.49% as @Sven noted. I've changed the ticker to VUSXX in both of my posts.
https://investor.vanguard.com/investment-products/list/mutual-funds?assetclass=money_market
In future, I will use "product-CD-owner level" instead of "product-CD level" for FDIC coverage.
Money in transit is an interesting point but may be covered by ICS. Note that ICS and CEDRAS services are now part of IntraFi Network. Cashier's checks are also money in transit but are covered by the FDIC.
https://www.intrafinetworkdeposits.com/
BTW, those who try to log on to VG Cash Plus pilot program may get this message:
"Enrollment is closed for now, but we'll be in touch
We're sorry you weren't included in the pilot phase of the Vanguard Cash Plus Account. We're in the process of adding clients and will let you know as soon as it's ready for you."