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.
Investor, be aware
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.
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.
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%.
As always, keep your eye on expenses. Some companies may advertise low expenses or “teaser rates,” but these are usually only temporary and designed to get you in the door. They can also bury information about their fees in their account agreements. It pays to read the fine print.
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.
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.
Let’s step back even further and look at the numbers because, in investing, numbers matter. The average expense ratio on Vanguard money market funds is half that of the industry average.*** 100% of Vanguard money market funds performed better than their peer-group averages over the last decade.**** And you could be earning over 20 times more on your cash by investing in a Vanguard money market fund, instead of a bank savings account.± (I’ll also note that this figure is expected to increase based on expectations for future interest rate increases.)
Your interest is our interest
We’ve all heard the famous saying: “There are two certainties in life: death and taxes.” But, I’ll add a third.
You can be certain that Vanguard’s interests are aligned with yours. Our company is designed to make money for you, not off you. No other firm is structured like we are. Other firms don’t have to put your interests first; so don’t be surprised if their priorities lie elsewhere.
So let’s recap. Here’s a quick checklist:
- Find out the yield on your savings account. Are you earning anything close to 2%?
- Check the fine print of your brokerage firm’s disclosure. Are you comfortable with how the sweep account works?
- Take a second look at your money market fund. What are you paying? Better yet, what are you earning?
**The Crane Money Fund average is 1.69% as of September 30, 2018. The Crane Money Fund average tracks the yield of 779 taxable money market funds. More information at www.cranedata.com.
***Vanguard average money market expense ratio: 0.13%. Industry average money market expense ratio: 0.26%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of September 30, 2018.
****For the 10-year period ended June 30, 2018, 9 of 9 Vanguard money market funds outperformed their Lipper peer-group averages. Results will vary for other time periods. Only money market funds with a minimum 10-year history were included in the comparison. Source: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which is not a guarantee of future results. View fund performance
±The average SEC yield (as of September 30, 2018) of Vanguard taxable money market funds is 2.08% and, according to bankrate.com, bank savings accounts had a national average APY of 0.09% (as of September 30, 2018).
- All investing is subject to risk, including the possible loss of the money you invest.
- Vanguard Prime, Federal, and Treasury Money Market Funds: You could lose money by investing in the funds. Although the funds seek to preserve the value of your investment at $1.00 per share, they cannot guarantee they will do so. An investment in the funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The funds’ sponsor has no legal obligation to provide financial support to the funds, and you should not expect that the sponsor will provide financial support to the funds at any time. The Vanguard Prime Money Market Fund is only available to retail investors (natural persons). The Vanguard Prime Money Market Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors.
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- Past performance is no guarantee of future results.