Surprise! Brokerages Make Most From Your Cash, Not Commissions
We have long pointed out that investors have ignored one of the simplest, no-risk ‘free lunches’: enhanced cash returns. In this newsletter, we want to dive in a bit deeper to further illustrate this point.
Meager cash returns from banks
Of course, we have regularly pointed out that investors and savers have lost out substantially from their bank deposits. The following is one example newsletter we wrote recently: November 12, 2018: The Staggering Low Interest Rates From Big Banks. At this moment, even after Treasury Bills (T Bills, i.e. Treasury debt matured in 3 months) have been paying 2.21% (see this link, for example), major banks are still paying pittance: Bank of America: 0.03%, Chase: 0.01%, Wells Fargo: 0.01%. These banks can simply make more than 2%, the difference of interest from lending money to government and paying you. In fact, they can make more by lending to businesses and individuals that pay higher interests.
In February 4, 2019: Cash And Money Market Funds: Interests And Safety, we also discussed that as a consumer, you can act like a bank by buying T Bills (thus, lending to government) to boost your returns. If you don’t want the hassle and restrictions, you can actually purchase a money market fund. A Federal money market fund is ‘almost’ as safe as cash (sans no FDIC insurance). At the moment, Vanguard Treasury Money Market Fund pays 2.22%!
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