Too many investors listen to the siren call of high yield when there is a way to increase their income right under their noses. Well, at least right under their noses when they are looking at their account statements.
Charles Schwab & Co. (SCHW) and TD Ameritrade (AMTD) are the two biggest online firms with the most brokerage clients. I have not researched Fidelity, E-Trade or any others, but I think the study of how these two Big Dogs provide better cash management possibilities than their normal "sweep" options will be of much benefit to the greatest number of SA readers. It will also provide information for those who invest at other firms to query their firms. In the spirit of communal learning here at SA, you are welcome to report your findings in the comments section!
These are money market funds (MMFs) which have a special relationship with Schwab and TD. You can buy any of scores of MMFs any time you like. The difference between those and the ones below is in the nature of buying, selling, the holding period, and possible fees at most MMFs.
Schwab's Special Money Market Funds
At Charles Schwab & Co., there are many options for how you invest your cash. If you stop thinking of it as money just sitting there, as merely cash available for a new opportunity, and think of it instead as "cash available for a new opportunity that pays me while waiting," you may well find the money multiplies just as it does when you receive dividends or other types of interest.
When you open your account, you may not even bother reviewing these other options. The same applies if your account has been open for some time. The Schwab default if you don't select something else seems to be the "Bank Sweep."
This is where Schwab pays you interest on the cash you keep in your account between investments. These funds are held at one or more FDIC-insured banks that are "Affiliated Banks" -- affiliated with Charles Schwab & Co., Inc. (Securities products and services (including unswept or intra-day cash, net credit or debit balances, and money market funds) offered by Charles Schwab & Co.)
That is good protection. However, you pay a high price for that extra layer of protection. The current annual percentage yield Schwab pays you is 0.023%. If you keep $1000 on balance with Schwab for one year, you will receive $2.30 in interest, before federal taxes, state taxes, inflation, dealer prep and undercoating. Keep $10,000 there between investments, at the end of the year you have $23 gross. No one tends to keep a static cash balance, but if you average that amount as you buy and sell during the year, the numbers are roughly the same.
There is a better way. Schwab also gives you the option of "Schwab Purchased Money Funds." In the company's description of these funds, they note these funds "are designed to offer stability of capital, liquidity, and current income." They provide higher yields across the board, no transaction fee to buy or sell, no minimum holding period, and a minimum to transfer in or out of $1. Importantly, they also offer a fine way for high-income investors to defray taxation by offering tax-exempt money funds as well.
Here are your choices. I have used Schwab Value Advantage Money Fund Investor Shares (MUTF:SWVXX) to good advantage:
SOURCE: Schwab website
There are even tax-exempt choices for two states with the combination of high taxes and high population, California and New York.
SOURCE: Schwab website
The caveat for both Schwab and TD is that this does not happen automatically. The cash is not swept without input from you. Once you have decided which money market fund choice you find most to your liking (which you can change any or every time), you simply buy it just like you would any other stock, ETF or traditional mutual fund.
Since you can buy and sell these money market funds (MMFs) any time with no fees, you can let your cash earn the higher interest level then, when you decide to buy an equity or other security, simply sell enough of the money market fund to cover the purchase and place your order once the sale of the MMF is complete. In some cases, even if you buy first and sell the MMF afterward, it will still be OK.
Warning: if you make your equity or fund purchase for more than the amount you have in your spare change cash sweep balance, and forget to sell shares of your MMF, it will create a debit balance in your account! You will then be in violation of your account agreement unless you have a margin account (which will be billed at margin interest rates for that day or two - or however long you forget to sell the MMF.)
TD Ameritrade's Special Money Market Funds
The situation is similar at TD Ameritrade, although the difference in interest earned can be even greater here.
TD's cash sweep options are similar. They offer a "TD Ameritrade FDIC Insured Deposit Account" which is their default cash sweep vehicle unless you make an alternate sweep election. Excess cash is swept to interest-bearing FDIC-insured accounts at one or more banks.
TD Ameritrade Cash is another sweep alternative. Cash balances held in your brokerage account earn simple interest and are protected by the SIPC coverage applicable to the account, and the supplemental private insurance obtained by TD Ameritrade. These are not FDIC-insured.
Finally they, too, offer Money Market Funds. While these carry some restrictions and are not available to all clients, as you can see from the table below, they are well worth using. [For instance, the account must be registered as a "Natural Person." Trusts, pension plans, corporations etc. are not permitted to use this feature.]
Also some of TD's money market funds may impose redemption gates, whereby you would have to hold for a certain time. You will need to inquire or read the fine print about the rules for each fund.
It is worth the inquiry. Take a look at the rates you will receive if you are passive in your investing and leave the cash in your account to be swept into the FDIC Insured Deposit Core vehicle:
SOURCE: AMTD website
That's right. If you don't elect a more rewarding choice by purchasing one of the below-listed MMFs, this is your default. On cash in the account under $25,000, you would receive 0.01% interest by having this cash swept into one of the TD bank choices. If you keep $1000 on balance with TD for one year, you will receive $1.00 in interest, again, before federal taxes, state taxes, inflation, dealer prep and undercoating.
Keep $24,999 in cash and they will reward you with $24.99. As you can see above, TD does pay more on a sliding scale if you allow them to float even larger amounts of your cash.
This is still better than the next alternative. The TD Cash Rates are 0.01% no matter how much you let them float. Have $50,000 in cash? You will receive 0.01% per year -- $50. Have $2,000,000 in cash in your account. You will receive the same 0.01%.
SOURCE: AMTD website
Fortunately, TD also has a better offer. As with Schwab, you just have to place an order to buy one of TD's approved money market funds. Here are the ones available at TD:
SOURCE: AMTD website
SOURCE: AMTD website
I happen to be using the Federated Prime Cash Obligations Fund (MUTF:PRCXX) right now on $100,000. It yields, as of today, 1.66%. That is 1.65% versus 0.01%, or the difference between accepting $100 annually or $1650.
I don't suggest you consider these opportunities if you have, say, $20,000 in cash and you plan to invest it in a week. You can spend more time doing cash management than you should on your due diligence if you do this too often for too small an amount. On the other hand, if you steadily average about $20,000 in between-investment funds over the course of the year, you need to decide if it is worth the time and attention to make an extra $310 per year.
I find it puzzling that many investors will strain to get an extra 1.65% in yield when selecting securities for income investing, eschewing a perfectly reasonable - and likely safer - security that yields just 6.45%, in favor of a likely less secure 8.1%-yielding choice, while leaving 1.65% on the table!
If you want to reach for yield, that is your choice. But at least consider maximizing the cash you hold during the period after which you have sold a position and before you have replaced it, or when you are waiting for a preferred share to come down in price below par, or don't trust the market, etc.
To refresh, these approved money market funds…
…provide higher yields,
…incur no transaction fee to buy or sell,
…have no minimum holding period,
…require only a $1 minimum to initiate a position,
…and can be placed in tax-exempt money funds if you so choose.
Good (and smart) investing,
JS
In the spirit of maximizing returns via the above ideas, if you choose to subscribe to The Investor's Edge in the next 32 days -- until Thanksgiving -- I will give you a 20% discount from the usual price for the first year of your membership. This is a limited time offer so act today!
