Vanguard, the second largest manager of money market funds with $327.3 billion, posted a new blog entry entitled, "Are games being played with your cash? Author Karen Risi writes, "With stocks on a nine-year bull market run, many of us probably haven't paid much attention to the yield on our cash accounts. But, maybe we should. Because some firms are playing games with your cash. Games that might leave you, well, shortchanged. Most of us have a cash account of some type -- the bank account from which we pay our bills, the money market fund that we'll tap for emergency expenses, or the brokerage account where our stock and ETF dividends are directed. And while your cash account may not represent the lion's share of your portfolio, it's worth paying attention to -- especially in this rising rate environment."
The piece continues, "If you have a savings account or a money market fund at another institution, you might want to ask some questions. Is your account giving you the best possible return? Are high fees eating into your returns? Are interest rate increases being passed along to you? Let's start there. Interest rates are rising. For the first time in many years, you have an opportunity to earn higher yields. With a bank savings account, it's doubtful that you're benefiting from rising rates."
Vanguard tells us, "Simply put, banks profit from what they earn on your deposits and what they pass on to you in the form of annual percentage yields (APYs). At the Federal Reserve's September meeting, the fed funds rate -- a gauge of short-term interest rates -- was raised to 2.25%. Yet, the average APY on a bank savings account is only 0.09% (as of September 30, 2018). That's relatively low compared to other cash options."
The blog says, "But what about opportunity cost? That's a high price to pay for services like overdraft protection and ATM access, and, to be fair, FDIC protection. You'll have to weigh those against the higher yields available on money market mutual funds, which on average are yielding 1.69% (as of September 30, 2018). I'll note here, the key word is average. Some money market funds yield north of 2.00%."
It comments, "Unfortunately, there's one more questionable practice to bring to your attention. Money market funds were traditionally used by brokerage firms as 'sweep' accounts, where idle cash is kept and dividends from long-term holdings are 'swept.' No more. Some brokerage firms are increasingly -- and without warning -- switching investors' default sweep accounts from money market funds to much lower-yielding bank accounts. These bank sweep accounts are typically owned by the brokerage firm's parent company and are an easy and lucrative source of revenue -- at your expense."
Risi adds, "Let's be clear about where Vanguard stands on this topic. Our only sweep account is Vanguard Federal Money Market Fund, which has an SEC yield of 2.00% (as of September 30, 2018) and an expense ratio of only 0.11%. We don't surreptitiously sweep cash into a lower-yielding bank account. We don't charge high expense ratios or keep your potential earnings for ourselves. We don't offer teaser rates. And we have nothing to hide."
In related news, Charles Schwab continues to take steps to move brokerage "sweep" assets from its money market funds to lower-yielding bank deposit options. A Prospectus Supplement for the Sweep Shares of Schwab Treasury Obligations Money Fund, Schwab U.S. Treasury Money Fund, Schwab AMT Tax-Free Money Fund, Schwab Municipal Money Fund, Schwab CA Municipal Money Fund and Schwab NY Municipal Money Fund" says, "At a meeting held on September 25, 2018, the Board of Trustees of The Charles Schwab Family of Funds (the Trust) approved the liquidation and redemption of, and the related Plan of Liquidation and Redemption for, the Sweep Shares (the Liquidating Classes) of each Fund." (See also Crane Data's October 2 News, "Schwab Liquidating Cash Reserves, Shift to Sweeps; Rates Inch Higher.")
Schwab explains, "Each Fund will redeem all of its outstanding Sweep Shares on or about April 10, 2019 (the Liquidation Date), and distribute the proceeds to its Sweep Shares shareholders in amounts equal to each shareholder's proportionate interest in the net assets of the Fund's Sweep Shares after it has paid or provided for all of its charges, taxes, expenses and liabilities. It is expected that this distribution will be at a $1.00 net asset value per share. Additionally, each Fund anticipates making a distribution of any net income and realized capital gains of the Liquidating Classes prior to or on the Liquidation Date, which may be taxable to Fund shareholders."
They write, "For taxable shareholders of the Liquidating Classes, the redemption of shares on the Liquidation Date will generally be treated as any other redemption of shares, i.e., as a sale that may result in a gain or a loss for federal income tax purposes. Instead of waiting until the Liquidation Date, a shareholder may voluntarily redeem his or her shares prior to the Liquidation Date.... Once the Sweep Shares of the Funds have been liquidated, all references to the Funds' Sweep Shares will be deleted from the Funds' Summary Prospectuses, Statutory Prospectuses and SAIs."
In Charles Schwab's most recent earnings release, CFO Peter Crawford comments, "Net interest revenue grew 41% year-over-year to a record $1.5 billion due to larger client cash sweep balances, as well as the cumulative effect of the Fed's rate normalization. Asset management and administration fees declined 6% to $809 million, reflecting lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions."
He adds, "The company's consolidated balance sheet reached $272 billion at month-end September, a $10 billion quarterly increase, largely driven by bank sweep transfers and client activity. We transferred balances totaling $23 billion from sweep money market funds to bank sweep in the quarter, bringing our 2018 transfers to $68 billion and leaving $33 billion remaining in sweep funds at quarter-end." (The Sweep Shares of the funds liquidating above total $8.4 billion.)
