For most of the last 15 years or so, putting your money in a bank or a money market mutual fund hasn't been attractive, at least with respect to earning a return. Interest paid on cash investments was next to nothing. But rates have risen sharply this year, creating renewed interest in cash investments.
Unfortunately, most local bank accounts still aren't paying much (0.14% is the average), but online banks are now paying 2%-3% on savings.
As for cash options available via a brokerage account, Wall Street Journal columnist Jason Zweig has an update.
For most investors, the two best choices are money-market mutual funds and U.S. Treasury securities.... The Crane 100 index of the largest money-market funds yielded [2.71%] this week [as of Oct. 9], up from only 0.02% in February and 2.01% at the end of August....
Your brokerage firm may force you into its "cash sweep," an account with an affiliated bank that is likely to pay much lower yields.... Sweep accounts are designed as a receptacle for the dividend and interest payments your stocks or other investments throw off. All too often, they function like a jail, imprisoning your cash where it earns punitively low returns. However, you should be able to transfer your cash balance out of any sweep accounts into money-market funds offering much higher income.
According to Crane Data, sweep accounts are paying an average of just 0.34%. But why settle for that when you can transfer cash into a money-market fund (MMF) paying eight times that amount? (We've provided a listing of top-paying MMFs at SMI's recommended brokers below.)
And there is one more option to consider: T-bills.
Invest in America
Government debt is an increasing attractively destination for cash holdings. The top-yielding offering — currently 9.62% annualized — is the I-Bond. Unfortunately, I-Bonds tie up your money for at least a year and, to complicate matters for investors, I-Bonds aren't available via a brokerage account. They have to be purchased directly from the U.S. Treasury via TreasuryDirect.gov.
However, other Treasury securities are available within a brokerage account. They're not yielding as much as I-Bonds, but if you buy shorter maturities, you can get to your money pretty much when you need it. (Brokers don't make money on newly issued Treasuries, so they typically don't advertise their availability. To find T-Bills on your broker's website, poke around in the bond category.)
Here's more on short-term Treasuries as a cash option from a Wall Street Journal news article titled "Battered Investors Now Find Thrills in T-Bills."
In recent years, T-bills — debt that matures in a year or less — often yielded effectively nothing, mostly useful for greasing the gears of financial markets as a close substitute for cash. Instead of receiving regular interest payments, investors buy T-bills at a discount and get the full face amount at maturity....
A year ago, one-year Treasury bills offered a yield of about 0.08%.... Now, one-year Treasurys are yielding 4%.
T-Bills are sold in maturities ranging from four weeks to 52 weeks, and unlike money-market funds, Treasury securities are backed by the U.S. government, so they're considered "risk-free."
They can be purchased in increments of $100, although the minimum purchase typically is $1,000. T-Bills are "zero coupon," meaning that you buy at a discount from the face value. The difference between what you pay upfront and the money you receive back after maturity is your return.
The lay of the land in MMFs
It's been almost five months since we provided an overview of top-yielding taxable money funds available via SMI's recommended brokers, so here's an update.
|FIDELITY||MORNINGSTAR CATEGORY||TICKER||7-DAY YLD*|
|Fidelity Money Market Fund||Prime Money Market||SPRXX||2.87%|
|Fidelity Government Cash Reserves||Money Market–Taxable||FDRXX||2.60%|
|Fidelity Treasury MMF||Money Market–Taxable||FZFXX||2.61%|
|Fidelity Government MMF||Money Market–Taxable||SPAXX||2.56%|
|*As of 10/07/22.|
If you're a Fidelity customer, you'll want to know that Fidelity offers FDRXX and SPAXX as default options for "sweep" money — i.e., Fidelity's "core position." FZFXX can be used as the core position in non-retirement accounts.
Fidelity's entire list of money market funds is here.
|SCHWAB & TD AMERITRADE||MSTAR CATEGORY||TICKER||7-DAY YLD*|
|Schwab Val Adv Money Fund – Inv Shares||Prime Money Market||SWVXX||2.91%|
|Schwab Treas Obl Money Fund – Inv Shares||Money Market–Taxable||SNOXX||2.74%|
|Schwab Govt Money Fund – Inv Shares||Money Market–Taxable||SNVXX||2.63%|
|*As of 10/07/22.|
Schwab doesn't allow any of the MMFs listed above to be used as default options for sweep money. Instead, Schwab offers three "Cash Features" accounts for sweep money: 1) The "Bank Sweep" that deposits money in interest-bearing deposit accounts (with Schwab-affiliated banks); 2) The "Schwab One Interest" account; and 3) the "Money Fund Sweep" account which puts money into the Schwab Sweep Money Fund (this option isn't available to most customers).
If you want to use a Schwab money market fund (and you're not eligible for option #3), you'll have to deploy your uninvested cash from one of the default options into a Schwab MMF. You can see all of Schwab's MMF offerings here.
|E-TRADE||MSTAR CATEGORY||TICKER||7-DAY YLD*|
|Federated Hermes Prime Cash Obl – Wealth||Prime Money Market||PCOXX||2.97%|
|Vanguard Federal Money Market**||Money Market–Taxable||VMFXX||2.79%|
|Vanguard Treasury Money Market**||Money Market–Taxable||VUSXX||2.67%|
|American Century Prime Money Market***||Prime Money Market||BPRXX||2.61%|
|*As of 10/07/22. **$3,000 minimum initial investment. ***$250 minimum initial investment.|
E-Trade offers MMFs from multiple companies. You see research all of them here (use the "Fund Category" option in the left column and choose "Money Market").
Vanguard investors have a sweet deal: The Vanguard Federal Money Market Fund (VMFXX) — currently yielding 2.79% — serves as the default "settlement fund" for Vanguard account holders.
You can see all of Vanguard's MMFs here.
Not keeping up with inflation
Although cash returns are far better than they have been in a long time, cash options are still fighting a losing battle against inflation — but that is almost always the case!
Nevertheless, by deploying your cash strategically, you can close the gap between inflation and returns quite a bit.