September 25, 2017: Fees In Cash Investments

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As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

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Fees In Cash Investments

Expenses/fees in mutual funds have come down a lot since John Bogle, the founder of Vanguard Company, first introduced index funds and started the low cost investment crusade in 1970s. The 0.03% expense recently instigated in Schwab S&P 500 index fund (SWPPX) signifies how much fees in mutual funds have come down. Marketing plots or not, investors now can expect to spend 0.1% or so in many stock and bond index funds.

However, fees in cash investments or ultra short term cash like investments or savings are still extremely high. They often go unnoticed. To illustrate:

Expenses in money market funds

Funds	Annual Expense	Minimum	7-Day Yield
SWPPX (Schwab S&P 500 Index)	0.03%
VFINX (Vanguard 500 Index Investor)	0.14%
Vanguard total bond market index fund (VBMFX)	0.15%
Schwab Treasury Money Market Fund	0.65%/0.77%*	$25,000	0.7%
Schwab Value Advantage Money Market Fund	0.45%/0.58%	$25,000	0.9%
Fidelity Treasury Money Market Fund	0.42%	0	0.65%
Vanguard Treasury Money Market Fund (VMFXX)	0.11%	$3,000	0.98%

*: net expense ratio/gross expense ratio (net expense ratio represents fund management’s voluntary fee waiver that might go away anytime)

You would think for safest (and thus dullest?) money market funds, their expense ratios should be lower than trickier/riskier stock or bond funds. How complicated can it be to invest in some of the safest short term debts such as Treasury bills. You would be wrong, in fact, wrong by a big margin!

Notice a Treasury money market fund merely purchase US Treasury bills that are mature in short amount of time, as short as one month. As usual, you can only purchase these funds in their brokerages respectively.

Based on Fidelity, the Fidelity Treasury money market fund’s average maturity is 40 days:

So this money market fund’s investor is paying 0.42% annually to just get invested in US Treasury bills (mature in one year or less is called Bills).

Similarly, Vanguard money market fund has a average 58 days maturity. Though its expense is much lower (0.11%), it’s about the same as its stock index funds or bond fund (VBMFX).

Investors are also paying similar (or slightly higher) fees to invest in a prime money market fund that can invest in other government debts and high quality corporate bank loans in addition to Treasury bills.

Banking

Banks also offer high yield savings or money market accounts. One can find some high yield savings or money market accounts through a website like bankrate.com. For example, here are some of the best rates offered nationwide:

Unfortunately, these credit unions/banks do not always offer the best rates. Many of them just offer some promotion high yielding rates to attract new customers. To get such a good rate, one has to open a new account in a bank and then transfer money from/back to his/her primary bank account. This is too much hassle.

On the other hand, the rates of money market accounts and savings accounts in big banks are almost zero in today’s low rate environment. For example, our last check with Bank of America indicates it offers 0.03% to 0.06% interest rates!

Do it yourself, Treasury bills

It turns out that you can do better, much better when it comes to invest in Treasury bills. There are two ways for one to purchase Treasury bills.

The first way is to purchase Treasury bills from your brokerage account. For example, from a Schwab brokerage account, one can purchase Treasury bills for free:

At the moment, you can get a T-Bill that matures in 50 days to yield 0.85%-0.9%. For a 3 month T-Bill, you can get about 1% yield. You can find this from the YTM (Yield To Maturity) column.

A broker charges some nominal fee when you purchase Treasuries through them.

The other way is to purchase newly issues T-Bills through public auction from TreasuryDirect.com. You can open an account online on the website and then link with your bank account. You can then simply buy one of the safest and most liquid short term cash equivalent T-bill without paying any commission and fee. At the moment, here are the rates:

So, one can get an interest rate 0.95% one month T-bill, or 1.04% 3 month T-bill or 1.27% one year T-bill from this website. All you need to do is to login to your account and issue purchase orders. The minimum amount is $100 and it increments with $100 too. When a bill matures, you can re-invest or just move the money back to your bank account. Thus, this is actually very flexible for even small accounts. The one month maturity bills are also liquid and flexible enough for most spending.

Summary

Cash investments are the final frontier in low cost investing. Banks and/or brokerages, acting as middlemen, have charged extremely high fees traditionally. Roughly speaking,their fees can be from 1% to 3%. This has not come under much public scrutiny. However, with some effort, investors can completely eliminate fees by going directly to TreasuryDirect.com to purchase the safest debts.

To get even better yields, investors can also purchase brokered Certificate of Deposits (CDs) that have various maturities (such as 3, 6, 9, 12 and 24 months). Banks make CDs by pulling a basket of bank loans (to high quality companies) and government debts (such as Treasury bills). CDs are insured by FDIC up to $250,000. At the moment, for example, one can purchase a 3 month CD from Schwab that yields 1.25%.

In a word, if you put some effort (maybe 10-20 minutes monthly?), you can save yourself hundreds to thousands of dollars.

Market Overview

Investors seem to start to find out it’s too expensive for growth stocks and now they started to rotate to value stocks. This resulted in some loss in high growth stocks. However, small cap stocks, high yield bonds and foreign bonds are all still exhibiting strength. Again, we are not seeing considerable waning of investors’ risk appetite. But we need to be reminded that the sentiment can change quickly, especially in an elevated market. So stay the course and manage risk accordingly.

For more detailed asset trend scores, please refer to 360° Market Overview.

Now that the Trump administration has been in the office for more than half a year, it has stumbled and encountered many difficulties to implement its promised changes in terms of tax cuts, job stimulation and infrastructure spending. On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in.

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future.

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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