You’re Giving Away Yield and Don’t Even Know It

It’s return time.

Savers weren’t the only ones who suffered from low interest rates for most of the last decade. Some asset managers also suffered, but those days are gone.

The Federal Reserve cut short-term interest rates in 2008 — and kept them at almost nothing, except for a brief interlude, until earlier this year.

With interest rates so low, asset managers had little choice but to forgo most of their fees on money market mutual funds. Otherwise, investors would often have gotten a negative return after managers accepted their cut.

Between 2009 and 2021, asset management firms waived more than $53 billion in these fees, according to the Investment Company Institute.

They are quickly recovering those lost fees. This is limiting investor returns.

As of late 2021, no U.S. money market fund charged more than 0.18% in annual expenses, according to Crane Data, a Westborough, Massachusetts, company that tracks money market funds and other cash investments.

As of September 30, 210 money funds — a quarter of the total — were charging at least 0.5% in annual expenses, according to Crane. Nearly two dozen weighed 1% or more.

This helps explain why, with one-month Treasuries and commercial paper yielding around 3.2% this week, the average monetary fund has yielded just under 2.8%.

That’s way better than the pathetic 0.02% that cash funds were yielding on December 31st. But it’s not good enough.

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Let’s put these costs into perspective by comparing cash funds to other types.

In the 1990s, total fees on equity mutual funds averaged about 1%.

Since then, equity fund rates have fallen sharply under strong competitive pressure from the Vanguard Group, the giant of index funds, and cheap exchange-traded funds.

Weighted by size, the average equity mutual fund charged 0.47% in annual expenses in 2021, according to the Investment Company Institute. Equity ETFs have gotten even cheaper, averaging 0.16%.

What happened to money market rates over the same period? In 2008, taxable funds charged an average of 0.48% of annual expenses, with the top 100 charging 0.37%, according to Crane. As of September 30 of this year, average spending was 0.39% among all taxable money market funds and 0.26% among the top 100.

Instead of falling by more than half like equity fund rates, money fund spending has dropped by less than a third — thanks to the sharp rise this year.

While their portfolios tend to look similar, money funds still pick each investment manually, rather than passively replicating an entire market, as equity and bond index funds do. This kept their costs relatively high.

Currency funds with higher fees are likely to have lower net returns; every penny the manager takes is a penny less for you. Those with annual expenses of at least 0.5% earn an average of 2.18%, versus 2.76% for the top 100 money funds.

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All other things being equal, higher cost funds should have lower yields – unless managers take extra risks to try to overcome the hurdle of higher fees.

On average, funds with expenses greater than 0.5% have bonds with maturities 10% longer – 18 days versus 16 days for all money market funds.

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This makes those with the highest fees a little riskier. To be sure, since all money funds have short-term, high-quality debt, none are likely to fall below their default value of $1 per share.

But one, the Reserve Primary Fund, “broke the ball” in 2008, dropping to 97 cents a share – a 3% decline in assets investors had hoped to remain 100% safe. Why risk even the remote chance of a repeat when you want your money to be perfectly safe? Avoiding high-spending cash funds should reduce not only your costs but also your risk.

The recent rise in fees raises a bigger question: is it worth owning money market funds?

They still hold $4.58 trillion. This is in part because money market mutual funds are convenient. You receive free checks, transfers to and from your bank, exchanges in and out of other mutual funds and withdrawals at any time without penalty.

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However, financial advisors may charge their own annual management fees on the money you hold in a monetary fund – which they do not normally charge on your Treasury bills or certificates of deposit at your bank. This stream of fees gives them an incentive to recommend, or leave in place, a cash fund, even if it’s not the best option for you.

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Brokers can pinch their pennies even more. So-called sweep options, where a brokerage automatically directs any money you earn from dividends, interest, or sales, typically yields less than 0.5%.

Banks, brokerages and fund companies are counting on you to leave your money where it is, allowing money funds to remain one of the last bastions of high fees.

You may have to keep some money in cash funds for convenience. But you can increase your cash return above 3% by purchasing Treasury bonds directly, investing in CDs from online banks, or using a fee-buying service like MaxMyInterest.com.

Investments are finally producing income again. You can, and should, have your share.

write to Jason Zweig at [email protected]

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