![]() ![]() It was only the second time in history that a money market fund “broke the buck,” that is, reported a share’s value at less than a dollar. In the fall of 2008, in the midst of the financial crisis, a prominent money market declared that investors would be facing a loss. RiskĪs the SEC disclosure requires, “While investor losses in money market funds have been rare, they are possible.” Money markets issued by non-FDIC-member investment companies are not FDIC insured. Prime money markets typically focus on short-term commercial paper, Government money markets on bills issued by the federal government and its agencies, and Tax-Free funds on short-term municipal bonds whose interest is exempt from federal taxation. Money markets are classified into three groups : Prime, Government, and Tax-Free. In general, the longer the note, the greater the risk that something could disrupt the issuer or market. The average maturity of holdings can also differ money markets can hold securities that mature in 13 months or less. Money markets trade in short-term notes – but there are not only different investment policies but different classes of money markets, too. Using modern rebalancing software, investment advisors can set brokerage sweep accounts to automatically transfer balances to higher-earning money markets, a service that can make a difference over time. Individual investors may benefit from monitoring these balances manually, occasionally transferring money from a sweep account to a more attractive money market. According to Crane Data, in the summer of 2019, the rate of return in brokerage sweep accounts varied from north of 2% to as little as 0.01%. The catch is that due to fee differentials, the rate of return varies widely across brokerage firms and plans. ![]() This is a service that is beneficial to the brokerage customer since the account provides for the immediate payment of interest, which is an improvement over a non-interest-paying holding account. Sweep accounts are the cash accounts that brokerage firms use as the default option for the proceeds from sales and dividends as they arrive. Their difference is a relatively simple distinction and one that is familiar to investment professionals, but which may not be apparent to many retail investors and clients. Money markets and sweep accounts both hold short-term investments. The Difference Between Money Markets and Sweep Accounts This is especially relevant as the bull market in stocks extends into record territory and bond yields are at historic lows, developments that can drive an increased allocation to cash accounts. While it’s true there is much less diversity in money markets than, say, alternative investments, we believe it’s a mistake to simply assume one is as good as the next – an assessment less true as yields have improved over the past year. For most of the years since the Great Recession, money market yields have been zero or close to it, reinforcing the lack of scrutiny. There’s the sense that money markets, the most common type of cash account, are commodities, and that one is much the same as the other. ![]() It is the last of these that typically gets the least attention and scrutiny. Investors are encouraged to think in terms of asset classes: stocks, bonds, alternatives, and cash. Making Sense of Money Markets and Sweep Accounts Not All Cash Accounts are Made the Same ![]()
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