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. You may not be getting the best possible return on your cash.
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, 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, you may not be benefiting from rising rates.
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 November 30, 2018).* That’s relatively low compared with other cash options.
To be fair, bank savings accounts can have characteristics that differentiate them from other cash investments. For example, bank accounts have FDIC protection, which means bank deposits are guaranteed (within limits) as to principal and interest by an agency of the federal government. Additionally, some may offer overdraft protection, ATM access (immediate access to your money), and other convenience features.
As an investor, you have to weigh the value of these features against the potential risk and reward of investing in money market mutual funds, which on average are yielding 1.88% (as of November 30, 2018).** I’ll note here, the key word is average. Some money market funds yield north of 2.00% including both our Prime Money Market and our Federal Money Market Funds.***
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. Along those same lines, you should consider any differences in deposit or investment minimums, as well as potential costs of withdrawals or redemptions.
Unfortunately, there’s one more practice to bring to your attention. Money market funds were traditionally used by brokerage firms as “sweep” accounts, where cash is kept and dividends from long-term holdings are “swept.” No more. Some brokerage firms are 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 a source of revenue.
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 2.19% (as of November 30, 2018) and an expense ratio of only 0.11%. We don’t 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.
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, so they don’t have to put your interests first.
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?
*https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/. Accessed November 30, 2018.
**The Crane Money Fund average is 1.88% as of November 30, 2018. The Crane Money Fund average tracks the yield of 779 taxable money market funds. More information at www.cranedata.com.
***Vanguard Federal Money Market Fund has an SEC yield of 2.19% as of November 30, 2018. Vanguard Prime Money Market Fund (Investor Shares) has an SEC yield of 2.30% and Vanguard Prime Money Market Fund (Admiral Shares) has an SEC yield of 2.36% as of November 30, 2018.
†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 September 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 November 30, 2018) of Vanguard taxable money market funds is 2.26% and, according to bankrate.com, bank savings accounts had a national average APY of 0.09% (as of November 30, 2018). The SEC yield is the average amount earned by a money market fund’s investors (after expenses) over the past 7 days and then multiplied into an annual figure. APY is the total interest earned on a bank product in one year, assuming no funds are added or withdrawn. One big difference is that SEC yields don’t take into account compounding, which makes them seem lower when compared directly with APYs. To account for that, money market funds also report a “compound yield,” which can be compared to an APY.
- 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. Vanguard Prime Money Market Fund is only available to retail investors (natural persons). 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.
- Vanguard is client-owned, meaning the company is owned by its funds, which in turn are owned by their shareholders.
- Past performance is no guarantee of future results.