Am I paying Vang. money market (VMMXX) to hold my money?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Am I paying Vang. money market (VMMXX) to hold my money?

Postby papito23 » Sat Dec 22, 2012 5:15 pm

I never thought to look at an expense ratio of Vanguard's Money Market Fund (VMMXX)... (I'm a young investor, I've been told that MMs used to actually, you know, earn interest). Well, expense ratio is 0.20%... and it's earning 0.03%. So even in nominal terms, it appears it is oozing away 0.17% like a leaky pipe.

I understand that ERs are skimmed by reducing the reported returns of the fund (not, say, charging an annual ER fee, or transaction). Why then do I still see dividends post (I've netted a whopping $0.16 from Jan & Feb, but nothing since)... or has the fund only recently started distribution less than the ER and they just call it even-Steven?

(I am passing some money through to do an ACH-push to a hoop-jumping new checking account bonus and this finally dawned on me... thanks BHs for keeping me sharp. Or at least slightly less dull.)
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology
User avatar
papito23
 
Posts: 292
Joined: 6 Jan 2012
Location: midwest

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby livesoft » Sat Dec 22, 2012 5:17 pm

The 0.03% is after expense ratio is taken care of. You should be able to verify this by your statements. Is the value of your fund slowly oozing downwards?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 30735
Joined: 1 Mar 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Clever_Username » Sat Dec 22, 2012 5:19 pm

livesoft wrote:The 0.03% is after expense ratio is taken care of. You should be able to verify this by your statements. Is the value of your fund slowly oozing downwards?


When is the expense ratio taken out (whether for VMMXX or any other fund)? For some reason (and clearly I haven't paid attention to prior 401(k)s), I thought there was a once a year event when some fraction of the shares were sold and used to pay the expenses of the fund.
Some people set aside money for a rainy day. I'd like to be prepared for the monsoon season.
User avatar
Clever_Username
 
Posts: 307
Joined: 15 Jul 2012
Location: Southern California

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby livesoft » Sat Dec 22, 2012 5:21 pm

We always assume around here that the expense ratio is taken out a little bit every day. In reality I suspect the NAV is reduced every day by the expense ratio charge for that day. Then when a dividend is paid by any of the holdings in the fund, the NAV can be adjusted as well. Note that a money market fund, the NAV is kept at $1 for now, but is that $1.0000001 or $0.999999999 ?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 30735
Joined: 1 Mar 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Sat Dec 22, 2012 5:32 pm

Some of us assume that the fund pays expenses every day, but that the expense ratio is calculated according to a formula required by the SEC that has something to do with total expenses over some period divided by average assets averaged over that same period. Note that you cannot divide by the average assets until the period is over (although I guess we could guess about future expenses and future average assets). This ER has nothing to do with individual shares, but with the fund in total (i.e., taken as a whole). We could all be wrong in our assumptions.
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby lawman3966 » Sat Dec 22, 2012 5:40 pm

In all likelihood, you are paying VG to hold your money, but not for the reason you asked.

Ally Bank (not sure about any others) is paying 0.95% in savings and money market accounts (per their web site, as of 12/21/12). Thus, on a balance of $100,000, you (and many of the rest of us) are losing about $1000 per year by having money in money market accounts instead of Ally's accounts.

I am going to investigate this further. But, I must say that I currently see no reason not to move money from my taxable money market funds to Ally.
lawman3966
 
Posts: 837
Joined: 10 Aug 2008

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby JamesSFO » Sat Dec 22, 2012 5:59 pm

lawman3966 wrote:In all likelihood, you are paying VG to hold your money, but not for the reason you asked.

Ally Bank (not sure about any others) is paying 0.95% in savings and money market accounts (per their web site, as of 12/21/12). Thus, on a balance of $100,000, you (and many of the rest of us) are losing about $1000 per year by having money in money market accounts instead of Ally's accounts.

I am going to investigate this further. But, I must say that I currently see no reason not to move money from my taxable money market funds to Ally.


(1) FDIC limit is now $250K so why not $250K?

(2) You may despite FDIC insurance wish to diversify your bank choices, there are others than Ally with 0.95% and up, e.g. CIT Bank has ~1.05%, TIAA-CREF still has 1.25% (no new accounts), etc. But there are a number of banks still around 1%
User avatar
JamesSFO
 
Posts: 1763
Joined: 26 Apr 2012

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Sat Dec 22, 2012 6:20 pm

Speaking of how the expenses are accounted for, it's fairly obvious if you put yourself in the shoes of the fund. You need to:
1) Pay your bills, and
2) Minimize volatility of NAV.

So you pay the bills when they are due, but you amortize them on your books. You set up "accrued expense" liability accounts and increase them every time you recompute NAV (i.e., daily). Then, when the bill comes, you wipe out the corresponding accrued expense. Cash management (i.e., whether the money for the bill comes from dividends, cash inflows or asset sales) becomes an independent exercise.
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby HardKnocker » Sat Dec 22, 2012 6:39 pm

I use the Vangaurd Prime MM to make periodic investments in my funds and only keep a couple months worth in it.

The amount I pay over and above the pitiful interest for fund expenses is worth the convenience.

The amounts we are talking about are not significant.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
User avatar
HardKnocker
 
Posts: 1629
Joined: 6 Oct 2008
Location: New Jersey USA

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby stan1 » Sat Dec 22, 2012 6:51 pm

lawman3966 wrote:In all likelihood, you are paying VG to hold your money, but not for the reason you asked.

Ally Bank (not sure about any others) is paying 0.95% in savings and money market accounts (per their web site, as of 12/21/12). Thus, on a balance of $100,000, you (and many of the rest of us) are losing about $1000 per year by having money in money market accounts instead of Ally's accounts.

I am going to investigate this further. But, I must say that I currently see no reason not to move money from my taxable money market funds to Ally.


If you have $100K sitting in a Vanguard money market fund -- yes, you should have moved it elsewhere several years ago (or consider buying short term tax exempt bonds at Vanguard).
stan1
 
Posts: 3142
Joined: 8 Oct 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby peanutbuddy » Sat Dec 22, 2012 7:16 pm

below is a footnote attached to the expense ratio on page 1 of the prospectus for VMMXX - vanguard representatives tell me this ensures you are not currently being charged for holding money in the fund. This is the response I was given when I asked vanguard the question - can anyone else confirm this??


1 Vanguard and the Fund's Board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the
Fund's daily yield so as to maintain a zero or positive yield for the Fund. Vanguard and the Fund's Board may terminate the
temporary expense limitation at any time.
peanutbuddy
 
Posts: 13
Joined: 9 Nov 2012

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby papito23 » Sat Dec 22, 2012 7:20 pm

HardKnocker wrote:I use the Vangaurd Prime MM to make periodic investments in my funds and only keep a couple months worth in it.

The amount I pay over and above the pitiful interest for fund expenses is worth the convenience.

The amounts we are talking about are not significant.

I assume there is a reason why you don't directly debit your checking acct... ?
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology
User avatar
papito23
 
Posts: 292
Joined: 6 Jan 2012
Location: midwest

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Oicuryy » Sat Dec 22, 2012 7:31 pm

peanutbuddy wrote:1 Vanguard and the Fund's Board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the Fund's daily yield so as to maintain a zero or positive yield for the Fund. Vanguard and the Fund's Board may terminate the temporary expense limitation at any time.

I read that to mean that all Vanguard customers are subsidizing VMMXX shareholders. If VMMXX is not paying for all of its expenses then the other funds have to make up the difference because the funds own Vanguard. This is yet another reason why money market funds should be required to mark to market.

Ron
Money is fungible | Abbreviations and Acronyms
User avatar
Oicuryy
 
Posts: 801
Joined: 22 Feb 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Sat Dec 22, 2012 7:42 pm

papito23 wrote:I assume there is a reason why you don't directly debit your checking acct... ?

Rules change but old habits die hard.
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby HardKnocker » Sat Dec 22, 2012 9:04 pm

Oicuryy wrote:
peanutbuddy wrote:1 Vanguard and the Fund's Board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the Fund's daily yield so as to maintain a zero or positive yield for the Fund. Vanguard and the Fund's Board may terminate the temporary expense limitation at any time.

I read that to mean that all Vanguard customers are subsidizing VMMXX shareholders. If VMMXX is not paying for all of its expenses then the other funds have to make up the difference because the funds own Vanguard. This is yet another reason why money market funds should be required to mark to market.

Ron


It does not necessarily mean that. Vanguard may just be foregoing the expense charge and not passing it on.

Other Vanguard customers would no more be subsidizing MM shareholders than would any customer be subsidizing a shareholder of one of Vanguard low expense index funds.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
User avatar
HardKnocker
 
Posts: 1629
Joined: 6 Oct 2008
Location: New Jersey USA

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Sat Dec 22, 2012 10:24 pm

HardKnocker wrote:Vanguard may just be foregoing the expense charge and not passing it on.

But Vanguard is customer-owned. The only costs they can cut is salaries, such as manager compensation.
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Sat Dec 22, 2012 10:31 pm

Here is my vision. At my house, if I don't pay the gas and electric bill, I live in the dark and cold. Now consider Prime MM. Their employees are at the end of the third floor of building 2 North on the Vanguard campus. Because Prime doesn't bring in enough to pay its bills, those workers have no heat and electricity. They also have no computers that work, so your year end statement and 1099 will be hand written (I don't know what they are going to do for stamps).

My other vision is that the other funds will pay their gas and electric bills for them; that's a cross subsidy in my mind.
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Sat Dec 22, 2012 10:42 pm

Now here's a funny question: as a prudent Vanguard owner, do I want to minimize my investment in Prime MM, or maximize it? Yes, I realize that as a prudent family man I should seek higher interest rates elsewhere. The question is what's better for Vanguard. Probably the churn of using it like a checking account is not good?
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby HardKnocker » Sun Dec 23, 2012 8:30 am

sscritic wrote:Here is my vision. At my house, if I don't pay the gas and electric bill, I live in the dark and cold. Now consider Prime MM. Their employees are at the end of the third floor of building 2 North on the Vanguard campus. Because Prime doesn't bring in enough to pay its bills, those workers have no heat and electricity. They also have no computers that work, so your year end statement and 1099 will be hand written (I don't know what they are going to do for stamps).

My other vision is that the other funds will pay their gas and electric bills for them; that's a cross subsidy in my mind.


Is it also a cross subsidy that Vanguard could charge .50 for expenses for their Equity Index fund and increase their profits but instead only charges .20? In this case are Vanguard customers subsidizing the shareholders?

Nonsense.
Last edited by HardKnocker on Sun Dec 23, 2012 8:33 am, edited 1 time in total.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
User avatar
HardKnocker
 
Posts: 1629
Joined: 6 Oct 2008
Location: New Jersey USA

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby HardKnocker » Sun Dec 23, 2012 8:33 am

FNK wrote:Now here's a funny question: as a prudent Vanguard owner, do I want to minimize my investment in Prime MM, or maximize it? Yes, I realize that as a prudent family man I should seek higher interest rates elsewhere. The question is what's better for Vanguard. Probably the churn of using it like a checking account is not good?


Do what is best for you. That's capitalism.

If you don't like Vanguard's policies you are free to invest elsewhere. They are free to adjust their policies. Caveat emptor.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
User avatar
HardKnocker
 
Posts: 1629
Joined: 6 Oct 2008
Location: New Jersey USA

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby midareff » Sun Dec 23, 2012 8:43 am

lawman3966 wrote:In all likelihood, you are paying VG to hold your money, but not for the reason you asked.

Ally Bank (not sure about any others) is paying 0.95% in savings and money market accounts (per their web site, as of 12/21/12). Thus, on a balance of $100,000, you (and many of the rest of us) are losing about $1000 per year by having money in money market accounts instead of Ally's accounts.

I am going to investigate this further. But, I must say that I currently see no reason not to move money from my taxable money market funds to Ally.


Ally checking is paying .40% as well with free checks. Between the two (MM and checking) and a totally simple EFT system at Ally, I can't see a reason to take less return on cash elsewhere. It becomes a drops in the bucket thing. Between a couple hundred on interest and silly offers from credit card companies.. ie: AMEX 6% back on groceries, PenFed 5% back on gas, FIDO 2% back on everything, Discover 5% + 2% internet and resturant days, etc., the bucket can add to a ouple of thousand dollars a year. ... fast, easy, clean and free.
User avatar
midareff
 
Posts: 1769
Joined: 29 Nov 2010
Location: Biscayne Bay, South Florida

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby BBL » Sun Dec 23, 2012 9:20 am

livesoft wrote:We always assume around here that the expense ratio is taken out a little bit every day. In reality I suspect the NAV is reduced every day by the expense ratio charge for that day.


Calculated for each day pro rata and deducted from each funds books as part of the daily accounting process which culminates in reported NAV after market close figures are available.

Actual movement of the calculated expense amount from each funds cash [sweep] accounts [custodial] accomplished as part of the batch of transactions submitted each day and visible the next morning when verifying transactions [typical fund flow stuff: checks/wires/eft sent to satisfy redemptions, security purchase/sale settlements T + 3 typically, dividends from securities received, periodic fund dividends calculated and paid, etc.] from the sweep accounts as part of the prior business days fund activities.

.... at least that's what I hear.... Who's to say? :wink:
Last edited by BBL on Sun Dec 23, 2012 9:25 am, edited 1 time in total.
To win without risk is to triumph without glory. Pierre Corneille
User avatar
BBL
 
Posts: 716
Joined: 6 Aug 2011
Location: Location: Location

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Sun Dec 23, 2012 9:21 am

HardKnocker wrote:Is it also a cross subsidy that Vanguard could charge .50 for expenses for their Equity Index fund and increase their profits but instead only charges .20? In this case are Vanguard customers subsidizing the shareholders?

Nonsense.

Are you sure you know how to recognize nonsense when you read it?

Vanguard doesn't charge you a fee for owning a fund unless they tell you they charge you a fee for owning a fund. An expense ratio is not a fee. The SEC tells a mutual fund company how to calculate an expense ratio. Basically, they add up all their expenses for the year and divide by their assets. They don't get to make a number up. If the number is 0.20%, they don't get to make up an ER of 0.50%. And why would they? They don't get any more money from advertising a fake ER, and if they did illegally advertise a false ER, don't you think they would advertise a lower one and not a higher one?

Also, Vanguard doesn't have profits. Can you tell me what their profit was last year? Vanguard doesn't make a profit. If you don't believe me, will you believe David Swensen?
First, individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds, like those offered by Vanguard, which operates on a not-for-profit basis.
http://www.nytimes.com/2011/08/14/opini ... round.html

And finally, where do you buy shares of the Vanguard group so you can be a shareholder and enjoy some of these vast profits you imagine they make off their customers? Hint: you buy a fund share. The fund shares own the fund. The fund in turn owns a part of Vanguard. The customers are the shareholders.
Vanguard is owned by the funds themselves and, as a result, is owned by the investors in the funds
http://en.wikipedia.org/wiki/The_Vanguard_Group
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby petrico » Sun Dec 23, 2012 9:54 am

sscritic wrote:
First, individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds, like those offered by Vanguard, which operates on a not-for-profit basis.

http://www.nytimes.com/2011/08/14/opini ... round.html

Thank you for that excellent piece from Swensen, which I had missed.

The Mutual Fund Merry-Go-Round

--Pete
User avatar
petrico
 
Posts: 2143
Joined: 7 Apr 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Epsilon Delta » Sun Dec 23, 2012 1:20 pm

BBL wrote:
livesoft wrote:We always assume around here that the expense ratio is taken out a little bit every day. In reality I suspect the NAV is reduced every day by the expense ratio charge for that day.


Calculated for each day pro rata and deducted from each funds books as part of the daily accounting process which culminates in reported NAV after market close figures are available.


For a money market fund there are two different concepts of NAV. There is the "economic NAV" a theoretical concept and the "reported NAV". The "economic NAV" is everything the fund owns, divided by the number of shares. Under the current rules the "reported NAV" stays constant unless something goes horribly wrong. The reported NAV is normally $1.00, not $1.000000001 or $0.9999999 but $1 exactly. The difference between the "economic NAV" and the "reported NAV" is accounted for on the MM books as accrued interest. The customer can't see the accrued interest in day to day operations, it shows up at the end of the month when interest is credited to your account. It also shows up if you close your MM account in the middle of a month, at the end of the month, when the MM closes their books, your account still has some accrued interest and they send you a check.

Any day to day expenses will be debited from the accrued interest, just as any earning by the fund are credited to accrued interest. In theory there is no problem if accrued interest goes negative (because expenses are greater than earnings). But in practice this leads to a "pushing on a string" problem, for example if you close a MM mid month you would have to send a check to Vanguard and that does not work quite so well.
User avatar
Epsilon Delta
 
Posts: 3067
Joined: 28 Apr 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Sun Dec 23, 2012 1:33 pm

Epsilon Delta wrote: It also shows up if you close your MM account in the middle of a month, at the end of the month, when the MM closes their books, your account still has some accrued interest and they send you a check.

Are you sure? I don't know, but I do know that the other Vanguard bond funds pay the accrued interest at the time of the sale. In fact, I just got demoted from Admiral to Investor, so there were two transactions: the conversion of the shares held plus the purchase of new investor shares with the accrued interest on the Admiral shares. Both transactions occurred on the same day. The same thing happened when I sold all of a bond fund and sent the proceeds to a money market fund: two transactions on the same day.

P.S. I don't think it has to be a check. If you close your MM fund buy exchanging all for TSM, do they buy more TSM with the accrued interest? If they do, do they do it on the day of sale or at the end of the month (and at what NAV)? Or would they refuse to treat "all" as all and send you a check? I don't know. Someone needs to run an experiment. :)
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Epsilon Delta » Sun Dec 23, 2012 2:34 pm

sscritic wrote:
Epsilon Delta wrote: It also shows up if you close your MM account in the middle of a month, at the end of the month, when the MM closes their books, your account still has some accrued interest and they send you a check.

Are you sure? I don't know, but I do know that the other Vanguard bond funds pay the accrued interest at the time of the sale. In fact, I just got demoted from Admiral to Investor, so there were two transactions: the conversion of the shares held plus the purchase of new investor shares with the accrued interest on the Admiral shares. Both transactions occurred on the same day. The same thing happened when I sold all of a bond fund and sent the proceeds to a money market fund: two transactions on the same day.

P.S. I don't think it has to be a check. If you close your MM fund buy exchanging all for TSM, do they buy more TSM with the accrued interest? If they do, do they do it on the day of sale or at the end of the month (and at what NAV)? Or would they refuse to treat "all" as all and send you a check? I don't know. Someone needs to run an experiment. :)

The key point is that the accounting rules for MM funds are different than for bond funds. Even when MM rates were greater than 10% the NAV did not change during the month.

I ran the experiment a few years ago and the check was cut at the end of the month but that's incidental.
In theory Vanguard could credit the accrued interest before the end of the month if you close the account, they have the information so it's just a matter of accounting convenience, and yes they don't have to cut a check if they can credit you in some other way. Exactly what they do probably depends on exactly how you instruct them, with apparently insignificant differences in wording result in different treatments. Since the amounts are very small few people care.
User avatar
Epsilon Delta
 
Posts: 3067
Joined: 28 Apr 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Epsilon Delta » Sun Dec 23, 2012 3:33 pm

Epsilon Delta wrote:The key point is that the accounting rules for MM funds are different than for bond funds. Even when MM rates were greater than 10% the NAV did not change during the month.

Sscritic has pointed out that most bond funds accrue interest in the same way as MM funds, so it's not a difference between bond and MM funds but it is a difference between most fixed income funds and say equity funds, which do increase the NAV by any earnings they receive (including the pittance they earn on cash they hold for liquidity purposes)
User avatar
Epsilon Delta
 
Posts: 3067
Joined: 28 Apr 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby BBL » Sun Dec 23, 2012 7:31 pm

Epsilon Delta wrote:
BBL wrote:
livesoft wrote:We always assume around here that the expense ratio is taken out a little bit every day. In reality I suspect the NAV is reduced every day by the expense ratio charge for that day.


Calculated for each day pro rata and deducted from each funds books as part of the daily accounting process which culminates in reported NAV after market close figures are available.


For a money market fund there are two different concepts of NAV. There is the "economic NAV" a theoretical concept and the "reported NAV".


Dead-on explanation ED - thanks for the clarification.

Mea Culpa - as usual I was pontificating about the question I wanted to answer [basic daily accounting expense procedures as related to calculation and reporting of NAV in an open-ended mutual fund - yup I had a bond fund in mind]. Whether that had anything to do with the actual question posed in the thread or not... :shock: Poor form BBL!!!!
To win without risk is to triumph without glory. Pierre Corneille
User avatar
BBL
 
Posts: 716
Joined: 6 Aug 2011
Location: Location: Location

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Dandy » Mon Dec 24, 2012 11:08 am

The expense ratio for money market funds is relatively high because there are a lot of transactions affect money markets e.g. frequent trades due to short term focus, checkwriting, ACh investments in and out, being a clearing fund for brokerage trades, monthly dividends, exchanges etc.

It used to be that mutual fund money market funds earned enough with their investments in short term commercial paper etc that they could offer a much better yield with outstanding safety compared to other "safe" investments such as those offered by banks. That may never be the same again since there are further restrictions on the quality and term of money market investments, the discussion of possibly having the mutual funds break the buck, etc.

So, it pays to not keep much money in mutual fund money markets. Actually, those historically horrible banks actually offer a better deal in many cases. Higher yields and FDIC guarantees. This is especially true of on line banks. Now if those banks actually showed their equivalent of an ER you might find that the amount they skim off the top before paying you is much higher than Vanguand's publiched ER. However, it is waht trickles down to you that counts.
Dandy
 
Posts: 1841
Joined: 25 Apr 2010

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Mon Dec 24, 2012 11:34 am

Dandy wrote:Now if those banks actually showed their equivalent of an ER you might find that the amount they skim off the top before paying you is much higher than Vanguand's publiched ER. However, it is waht trickles down to you that counts.

Can I say Amen and not have it be considered a religious comment?

Your 1% at Ally might be 4% minus the 3% Ally takes for itself (ER = 3.0%).
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby HardKnocker » Mon Dec 24, 2012 12:06 pm

sscritic wrote:
HardKnocker wrote:
Also, Vanguard doesn't have profits. Can you tell me what their profit was last year? Vanguard doesn't make a profit. If you don't believe me, will you believe David Swensen?
First, individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds, like those offered by Vanguard, which operates on a not-for-profit basis.
http://www.nytimes.com/2011/08/14/opini ... round.html


Does a "Not-for-profit' make money for it's operators? Of course some of them do. Just check the books of any big-time NFP. The head honcho usually makes a huge salary. The salary is an expense. If they have lots of income they can increase their expenses (salaries) so the bottom line is nada.

How much does David Swensen make in salary and benefits? $5.3 MILLION in 2008-09! Mr. Swensen works for a NFP (Yale).

Does the Catholic Church make money? If you don't think they do just visit the Vatican. The Church is a NFP.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
User avatar
HardKnocker
 
Posts: 1629
Joined: 6 Oct 2008
Location: New Jersey USA

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Mon Dec 24, 2012 12:11 pm

Dandy wrote:Now if those banks actually showed their equivalent of an ER you might find that the amount they skim off the top before paying you is much higher than Vanguand's publiched ER.

They do, and there is a reason for that.

A bank is a risk reduction device. A money market mutual fund is a simple conduit.

A bunch of people and businesses borrow money from the bank. A lot of that debt is higher risk than what you find in an MM fund. It commands higher interest. On the other end, the bank takes your deposit and slaps FDIC insurance on it. With the insurance and the reserves, the bank can manage the risk of presenting low-risk deposit services to you and give higher-risk loans to others. It collects the spread on the interest rates.

An MM fund just takes your money and invests it in the safest debt that still makes reasonable money. It doesn't reduce your risk, and there's no insurance. There's also no spread on interest rates, just the ER.
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Mon Dec 24, 2012 12:16 pm

HardKnocker wrote:Does a "Not-for-profit' make money for it's operators? Of course some of them do. Just check the books of any big-time NFP. The head honcho usually makes a huge salary. The salary is an expense. If they have lots of income they can increase their expenses (salaries) so the bottom line is nada.

Nonprofits can have retained earnings, they just can't pay dividends. They also don't have owners, just trustees.

Mutual companies are not nonprofits, they have owners and do pay dividends. It's just that their owners are their clients.

The structure does have a conflict of interest between management (seeking to increase their compensation) and clients (seeking to minimize their costs). Liberty Mutual is a known sad case.
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Mon Dec 24, 2012 12:31 pm

HardKnocker wrote:
sscritic wrote:
HardKnocker wrote:Also, Vanguard doesn't have profits.

Does a "Not-for-profit' make money for it's operators?

Why are you arguing with yourself? At least it appears you are from your quotes. :)

You can confuse profit with salary if you like, but I consider them to be two separate words with two separate meanings. As you say, a salary is an expense. A mutual fund with lots of salary will have lots of expenses, which would be reflected in the ER. You wrote:
HardKnocker wrote:Vanguard could charge .50 for expenses for their Equity Index fund and increase their profits
(Note the correct attribution)

You used the word profit. I asked you to show them to me. You now try to misdirect the discussion to salary. I am not confused by the misdirection.
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby HardKnocker » Mon Dec 24, 2012 12:36 pm

sscritic wrote:
HardKnocker wrote:
sscritic wrote:
HardKnocker wrote:Also, Vanguard doesn't have profits.

Does a "Not-for-profit' make money for it's operators?

Why are you arguing with yourself? At least it appears you are from your quotes. :)

You can confuse profit with salary if you like, but I consider them to be two separate words with two separate meanings. As you say, a salary is an expense. A mutual fund with lots of salary will have lots of expenses, which would be reflected in the ER. You wrote:
HardKnocker wrote:Vanguard could charge .50 for expenses for their Equity Index fund and increase their profits
(Note the correct attribution)

You used the word profit. I asked you to show them to me. You now try to misdirect the discussion to salary. I am not confused by the misdirection.


Let me rephrase the word "profit" and instead call it "amount available for distribution to employees".

The comparison by the FNK to mutual insurance companies is apt. That is a much better comparison.

Anyway, the consumer must decide if the services provided justify the expense.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
User avatar
HardKnocker
 
Posts: 1629
Joined: 6 Oct 2008
Location: New Jersey USA

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby EyeDee » Mon Dec 24, 2012 5:57 pm

Epsilon Delta wrote:
sscritic wrote:
Epsilon Delta wrote: It also shows up if you close your MM account in the middle of a month, at the end of the month, when the MM closes their books, your account still has some accrued interest and they send you a check.

Are you sure? I don't know, but I do know that the other Vanguard bond funds pay the accrued interest at the time of the sale. In fact, I just got demoted from Admiral to Investor, so there were two transactions: the conversion of the shares held plus the purchase of new investor shares with the accrued interest on the Admiral shares. Both transactions occurred on the same day. The same thing happened when I sold all of a bond fund and sent the proceeds to a money market fund: two transactions on the same day.

P.S. I don't think it has to be a check. If you close your MM fund buy exchanging all for TSM, do they buy more TSM with the accrued interest? If they do, do they do it on the day of sale or at the end of the month (and at what NAV)? Or would they refuse to treat "all" as all and send you a check? I don't know. Someone needs to run an experiment. :)

The key point is that the accounting rules for MM funds are different than for bond funds. Even when MM rates were greater than 10% the NAV did not change during the month.

I ran the experiment a few years ago and the check was cut at the end of the month but that's incidental.
In theory Vanguard could credit the accrued interest before the end of the month if you close the account, they have the information so it's just a matter of accounting convenience, and yes they don't have to cut a check if they can credit you in some other way. Exactly what they do probably depends on exactly how you instruct them, with apparently insignificant differences in wording result in different treatments. Since the amounts are very small few people care.
.
Some more information from earlier this year.

We closed a Vanguard money market fund in my wife's IRA and the accrued interest dividend was transferred to the same fund that the base amount was on the day of the transfer - as a separate item.

We close a small Vanguard bond fund in our taxable account by transfer the money to another fund. A separate check for the accrued interest dividend was cut the day of the transfer and mailed. I have yet to figure out why they do not transfer the money like in the IRAs or transfer the money to the account where the accrued interest normally goes at the end of the month. Why they waste money sending a small check when it is not requested seems strange.
Randy
EyeDee
 
Posts: 978
Joined: 20 Feb 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby sscritic » Mon Dec 24, 2012 6:22 pm

EyeDee wrote:We closed a Vanguard money market fund in my wife's IRA and the accrued interest dividend was transferred to the same fund that the base amount was on the day of the transfer - as a separate item.

We close a small Vanguard bond fund in our taxable account by transfer the money to another fund. A separate check for the accrued interest dividend was cut the day of the transfer and mailed. I have yet to figure out why they do not transfer the money like in the IRAs or transfer the money to the account where the accrued interest normally goes at the end of the month. Why they waste money sending a small check when it is not requested seems strange.

A theory: you had dividends reinvested in the taxable bond fund. When the account was closed, there was no where to put the dividends. If you had changed your dividends to buy shares of the new fund before you closed the bond fund, the dividends would have been sent to the new fund.

That doesn't explain the IRA mmf closure.
sscritic
 
Posts: 19481
Joined: 6 Sep 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby EyeDee » Tue Dec 25, 2012 8:28 pm

sscritic wrote:
EyeDee wrote:We closed a Vanguard money market fund in my wife's IRA and the accrued interest dividend was transferred to the same fund that the base amount was on the day of the transfer - as a separate item.

We close a small Vanguard bond fund in our taxable account by transfer the money to another fund. A separate check for the accrued interest dividend was cut the day of the transfer and mailed. I have yet to figure out why they do not transfer the money like in the IRAs or transfer the money to the account where the accrued interest normally goes at the end of the month. Why they waste money sending a small check when it is not requested seems strange.

A theory: you had dividends reinvested in the taxable bond fund. When the account was closed, there was no where to put the dividends. If you had changed your dividends to buy shares of the new fund before you closed the bond fund, the dividends would have been sent to the new fund.

That doesn't explain the IRA mmf closure.
.
The dividends were NOT reinvested in the taxable bond fund, they were being sent each month to a bank account.

I would think they would have been either sent to that account or put in the fund where the money was transferred but this was not the case.

In fact this has happened to us before with the same situation where the dividends were not reinvested but transferred to a bank account. When we close a taxable bond fund we get a small check each time. The above was just explaining the most recent taxable example.
Randy
EyeDee
 
Posts: 978
Joined: 20 Feb 2007

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby kenyan » Wed Dec 26, 2012 1:05 pm

Aha! I am siphoning off all of your profits via my holding in VMMXX, which is whatever amount is insufficient to purchase another share of VSS in a given month.

I agree with sscritic that it sounds like a cross-subsidization in which the excess expenses of the money market not covered by its underlying assets must be borne by some other funds. Despite the disturbingly large size of the VMMXX fund - the single largest share class of any fund Vanguard offers - I'm sure this cost is in the miniscule fractions of a basis point.
Retirement investing is a marathon.
User avatar
kenyan
 
Posts: 2194
Joined: 13 Jan 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby Epsilon Delta » Wed Dec 26, 2012 1:28 pm

sscritic wrote:
That doesn't explain the IRA mmf closure.


I imagine the IRA has something to do with that, the IRA account agreement is quite different from a taxable account agreement.

In an IRA, Vanguard, as custodian, would cut the check to Vanguard Fiduciary Trust Co, the trustee, which would deposit it according to the terms of the IRA agreement (or instructions of the account holder). Apparently Vanguard handles the schizophrenia well enough to avoid the check. :happy Or something similar.

In any case there are reasons to avoid cutting a check in an IRA that do not apply to a taxable account. Most trustees are loath to distribute money to the account holder without explicit instructions.
User avatar
Epsilon Delta
 
Posts: 3067
Joined: 28 Apr 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Wed Dec 26, 2012 2:50 pm

kenyan wrote:Aha! I am siphoning off all of your profits via my holding in VMMXX, which is whatever amount is insufficient to purchase another share of VSS in a given month.

I agree with sscritic that it sounds like a cross-subsidization in which the excess expenses of the money market not covered by its underlying assets must be borne by some other funds. Despite the disturbingly large size of the VMMXX fund - the single largest share class of any fund Vanguard offers - I'm sure this cost is in the miniscule fractions of a basis point.

I think the ER went from .3% to .2% over the last year or two.
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby kenyan » Wed Dec 26, 2012 5:27 pm

FNK wrote:
kenyan wrote:Aha! I am siphoning off all of your profits via my holding in VMMXX, which is whatever amount is insufficient to purchase another share of VSS in a given month.

I agree with sscritic that it sounds like a cross-subsidization in which the excess expenses of the money market not covered by its underlying assets must be borne by some other funds. Despite the disturbingly large size of the VMMXX fund - the single largest share class of any fund Vanguard offers - I'm sure this cost is in the miniscule fractions of a basis point.

I think the ER went from .3% to .2% over the last year or two.


Right, I meant the ER increase in all other Vanguard funds (or, more likely, a lack of decrease) that would be caused by the 'subsidy.' If we are forced to subsidize 10 basis points (which is probably higher than reality) on the 120 billion of assets on the money market funds, then the remaining 1.6B of Vanguard assets might have a cost increase/lack of cost decrease of 0.75 basis points.

If your 10 basis point number is correct, I suppose the worst-case scenario (the entire cost decrease being due to subsidization) is worse than I would have suspected (though still very tame).
Retirement investing is a marathon.
User avatar
kenyan
 
Posts: 2194
Joined: 13 Jan 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Wed Dec 26, 2012 7:34 pm

Ugh. Can't they just deposit the $120B into 500,000 banks?

:mrgreen:
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011

Re: Am I paying Vang. money market (VMMXX) to hold my money?

Postby FNK » Fri Dec 28, 2012 4:11 pm

Go figure: Vanguard is telling me the MM ER went to 0.16% and a few growth funds gained a 0.01%.
User avatar
FNK
 
Posts: 1329
Joined: 17 May 2011


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: Angst, berntson, columbia, Crushtheturtle, EngineerEd, flossy21, freddie, Google [Bot], jjcarpenter, Methedras, Professor Emeritus, retiredjg, serbeer, SnowSkier and 88 guests