Smart money market fund options for liquidity and yield
Schwab’s money market funds are designed for income, stability of capital and convenient access to your money. They’re a smart solution for short-term savings such as an emergency reserve or a down payment on a house.
Generally stable investments, purchased money market funds can reduce your portfolio's volatility and provide typically higher yields than sweep money market funds. Benefits include:
Next-day access to your money when you sell shares by 4 p.m. ET
A choice of funds that offer taxable or tax-exempt income
Schwab provides a service that enables the uninvested cash or "free credit balance" in your brokerage account to earn income. We offer three such cash features:
The Schwab One® Interest feature pays you interest on cash awaiting investment.
The Money Fund Sweep feature automatically invests in and redeems funds from a sweep money market mutual fund.
The Bank Sweep feature1 automatically makes deposits to and withdrawals from deposit accounts at Charles Schwab Bank, an FDIC-insured depository institution affiliated with Schwab.
If you have $500,000 or more in household assets, you may request a sweep fund as an alternative through your Schwab Financial Consultant. Sweep fund yields are generally higher than those offered under the Schwab One Interest or the Bank Deposit features.
Money market funds differ based on the following criteria:
Purchased or sweep—Purchased money market funds provide next-business-day liquidity and must be actively bought or sold like other securities in which you are invested—unlike other securities, however, they can be bought or sold at no additional fee. Purchased money market funds require a minimum initial investment of cash and may also have ongoing minimum cash requirements. Sweep money market funds, on the other hand, have same-day liquidity—shares are automatically purchased or sold to cover transactions like trading or checkwriting. Due to this automatic liquidity, the operating expenses for sweep money market funds are usually higher than those of purchased money market funds.
Fund fees and expenses—In exchange for higher minimum initial requirements and next-business-day liquidity, purchased money market funds usually have lower operating expense ratios (OERs) and higher yields than sweep money market funds. Sweep money market funds' expenses tend to be higher by comparison because they provide same-day liquidity and the convenience of automatic cash movement to cover your transactions.
Tax implications—If you are in a higher income tax bracket, you may want to consider a fund that provides income exempt from federal, state and, in some cases, local taxes. When choosing between a taxable and tax-exempt money market fund, you should compare the current yield of the taxable money market fund with the tax-equivalent yield of the tax-exempt money market fund. The tax-equivalent yield is the yield you would need to get from a taxable investment in order to match the yield paid by a tax-exempt investment with all applicable taxes taken into account. To determine the tax-equivalent yield for a tax-advantaged money market fund, use the tax-equivalent calculator.
Risk—The underlying securities in which money market funds invest are regulated by the SEC and thus involve limited risk. Under SEC rules, money market funds cannot invest in low-rated securities. Depending on your risk tolerance, you may want a fund that only invests in securities backed by the full faith and credit of the U.S. government.
For instance, if the yield is 3% and your federal tax rate is 28%, your tax-equivalent yield is 3% divided by (1.00 - .28) = 4.17%.
What role does a purchased money market fund play in my portfolio?
Designed for your short-term needs (money you may access within the next year or for emergency funds), money market funds may play a significant role in your portfolio’s overall asset allocation. Benefits include:
Security—The funds invest exclusively in dollar-denominated, high-quality, short-term instruments issued by the federal government, corporations, municipalities and banks.
Stability—The funds are managed (though not guaranteed) to maintain a constant $1.00 net asset value (NAV) per share.
Liquidity—Funds will be available the next business day if sold by 4 p.m. ET.
Diversification—The funds are considered less volatile than individual stocks or stock funds, and are often used to help weather market fluctuation.
Tax advantages—Municipal money market funds can provide federal and state tax-free income, an advantage for those in higher tax brackets.
Money market funds are mutual funds that invest in high-quality, short-term debt instruments like commercial paper, CDs, bank notes and U.S. government obligations that have maturities of 13 months (397 days) or less. Money market funds, by definition, must maintain a dollar-weighted average portfolio maturity of 90 days or less. In a rising interest-rate environment, this means a money market fund portfolio has the flexibility to constantly update its holdings to include higher-yielding securities.
An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC). Because the value of money market funds is intended to be stable, they invest in short-term securities, none of which can represent greater than 5% of the total value of the fund. Since money market funds are not insured, they usually pay slightly more than money market deposit accounts, accounts which banks offer that are FDIC-insured and offer next-day liquidity.
What are the risks of investing in a money market fund?
While money market funds are designed to have stable principal—in other words, a constant $1.00 price per share—they are subject to:
Income risk—This occurs when short-term interest rates decline. In comparison to rates locked in over a longer time horizon, money market funds will generate less income due to their shorter time horizon. Conversely, when interest rates rise, money market fund yields tend to rise faster than longer-term interest products.
Inflation risk—This occurs when inflation increases faster than short-term interest rates. Inflation risk is limited, because the average duration of money market funds is 90 days and short-term interest rates usually incorporate inflation.
Credit risk—This occurs when an underlying security defaults or its credit rating is downgraded. Because money market funds are mutual funds which invest in hundreds of securities, the effect of a single default or downgrade is minimal. Money market funds cannot invest more than 5% of their portfolio in any single issuer, and exposure to any one industry is similarly limited. Further, money market funds must invest exclusively in higher-quality securities. They are required to invest in securities that are in the top two tiers of credit quality. Schwab money market funds typically invest only in securities in the topmost tier of credit quality.
Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value
1. Bank sweep accounts are generally held at Charles Schwab Bank. Schwab Bank and Charles Schwab & Co., Inc. are separate but affiliated companies and wholly owned subsidiaries of The Charles Schwab Corporation. Funds deposited at Schwab Bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 when aggregated with all other deposits held by you in the same capacity at Schwab Bank. Funds on deposit at Schwab Bank are not deposits or obligations of Charles Schwab & Co., Inc. and may not be covered by the Securities Investor Protection Corporation (SIPC). Note: The Bank Sweep feature available to customers that maintain brokerage accounts at our affiliate, Charles Schwab & Co., Inc., is not subject to the FDIC’s Transaction Account Guarantee Program, thus, Bank Sweep funds deposited in Schwab Bank are not guaranteed by the Transaction Account Guarantee Program. However, funds held in deposit accounts at Schwab Bank under the Bank Sweep program will continue to be insured until December 31, 2013, for up to $250,000 under the FDIC’s general deposit insurance rules.
An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC). Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
Investment income on some tax-free funds may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax.
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can view, download and print a prospectus by clicking on Prospectuses & Reports. Please read the prospectus carefully before investing.
Charles Schwab Bank and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.
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