Two major articles on money market funds and "cash" were published on Friday, which examine the two biggest stories of August to date -- brokerage sweep account changes and money fund asset growth. The first, Barron's "How Brokerages Use 'Sweep Accounts' and Cash In on Your Desire for Convenience," discusses brokerage programs and deposits vs. money funds, while the second, Bloomberg's "The $3.4 Trillion Haven Where Investors 'Hide Out for a While'," discusses the recent surge in money fund assets. We quote from these articles below. (See our August 13 News, "Cash of the Titans: Schwab vs. Fidelity; MF Yields Dip Below 2.0 Percent," and our August 16 Link of the Day, "ICI: Money Fund Assets Push Higher.")
Barron's Daren Fonda writes, "With the market getting choppy, investors may want to horde some cash for peace of mind -- and dry powder in case stocks get really cheap. But don't expect to earn much yield on cash reserves if you keep them in a brokerage 'sweep' account.... The deposits are also a major profit center for brokers and affiliated banks: Uninvested cash in a sweep account can be shifted to a bank deposit account, freeing it up be reinvested for the firm's benefit. Sweep yields average just 0.25%, according to Crane Data, well below the 1.8% average for retail money-market funds."
The piece explains, "Brokerage customers can buy money-market funds to capture more income. But most brokers no longer provide a money-market as the sweep account, for trading or other liquidity needs.... Brokers that have eliminated money markets for cash sweeps include Charles Schwab (SCHW), E*Trade Financial(ETFC), Edward Jones, LPL Financial (LPLA), Bank of America Merrill Lynch (BAC), Morgan Stanley (MS), and TD Ameritrade (AMTD). Only two holdouts -- Fidelity and Vanguard -- still make money markets available for daily trading and liquidity."
The piece quotes Crane Data's Pete Crane, "Sweep accounts are built for convenience, and brokerage firms have taken advantage of the transactional aspect of the money.... Customers are harvesting pennies, but it adds up to millions of dollars in profits for brokerages and banks."
Barron's also quotes Sandler O'Neill analyst Richard Repetto, "It's more profitable for brokers to move the cash to their banks." They write, "Brokerage firms are losing revenue in other areas, as they wage price wars over trading commissions and management fees. That's making sweep deposits more important as a funding source for asset growth."
The article continues, "To see how the moving parts work, look at Schwab. The firm is partly a discount broker and asset manager, and partly a federally regulated bank (through its Schwab Bank subsidiary). Client cash held at Schwab recently hit $405 billion, with individual accounts averaging $33,876, according to Repetto. That sharply exceeds client cash held at TD Ameritrade (averaging $12,395 per account) and E*Trade ($10,728). Schwab makes most of its money off interest income from reinvesting customer cash and other assets. Of its $5.4 billion in revenue in the first six months of 2019, $3.3 billion was net interest on securities and lending."
It adds, "Rather than swallow ultralow yields, investors can -- and should -- move cash out of a sweep account if they don't need the daily liquidity. Bank products like high-yield online checking and savings accounts pay around 2% (and are FDIC-insured); money-market mutual funds yield more than most sweep accounts (though they aren't insured). Most brokerage firms only offer proprietary funds or a couple of choices from external fund companies, including tax-free municipal funds."
Finally, they write, "For retail investors, one of the best choices is Vanguard Federal Money Market (VMFXX), yielding 2.13%, though it may not be available outside Vanguard (it’s at TD Ameritrade and E*Trade, for instance, but not Fidelity or Schwab). None of these yields will last if the Fed keeps cutting rates. But for now, they beat sweeping up the cash crumbs left by most brokerage firms."
In the second article, Bloomberg writes, "As fears of a global economic slowdown deepen and stock prices swing wildly, many U.S. investors are running for cover in money-market funds.... That has triggered a rally in Treasuries which pushed yields on even 30-year government bonds to near or below those of short-term assets held by money market funds, which are still yielding close to 2.2%."
They continue, "Money-market mutual funds saw $18 billion of inflows in the week ended Wednesday, pushing total assets to an almost 10-year high of $3.35 trillion, data from the Investment Company Institute show. The flows are partly driven by the desire for investors to 'take some chips off the table and hide out for a while,' said Rob Sabatino, global head of liquidity at UBS Asset Management, which has $831 billion under management."
Bloomberg tells us, "Institutional and individual investors have few better places to park their cash given that bank deposit rates are significantly lower and market volatility has erupted in August. Many investors are simply 'parking it in cash,' Sabatino said, using the industry short-hand for money market mutual funds."
Finally, the article also quotes Federated Investors' Chief Investment Officer of Global Money Markets, Debbie Cunningham, "Investors are looking for a safe-haven place to take cover that's not subjected to volatility." It adds, "With Federated cash funds yielding around 2.1% to 2.3%, compared with a two-year Treasury yield hovering around 1.5% and a 30-year rate of 1.98%, money market funds are 'still pretty attractive and looking better than debt securities.'"
