cheaper money market funds

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cheaper money market funds

Postby asset_chaos » Sat Dec 29, 2012 3:32 am

I don't recall seeing an announcement of this, but I logged on to Vanguard just now, and there was a note on my balance and holdings page that the cost of Prime money market fund had dropped to 16 bp from 20 bp. My only question is have cash rates dropped again so that Vanguard has to do something to keep the net-of-cost interest rate above zero, or should I be looking forward to Prime's rate increasing to a whopping 0.08% pa? In any event, kudos to Vanguard for continuing to lower costs.
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Re: cheaper money market funds

Postby umfundi » Sat Dec 29, 2012 3:55 am

asset_chaos wrote:I don't recall seeing an announcement of this, but I logged on to Vanguard just now, and there was a note on my balance and holdings page that the cost of Prime money market fund had dropped to 16 bp from 20 bp. My only question is have cash rates dropped again so that Vanguard has to do something to keep the net-of-cost interest rate above zero, or should I be looking forward to Prime's rate increasing to a whopping 0.08% pa? In any event, kudos to Vanguard for continuing to lower costs.

Let me see.

The ER is 0.20%. My NAV is $1.00.

The ER is 0.16%. My NAV is $1.00.

How is the ER on a money market fund at all relevant?

(My NAV is $1.00. I don't care how they get there.)

Keith
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Re: cheaper money market funds

Postby asset_chaos » Sat Dec 29, 2012 4:37 am

Umfundi,

I don't understand: I don't see where per share NAV comes in. I'd have thought that the return on cash in the fund---the interest I receive--- is the gross interest rate minus the costs of operating the money market fund. For every dollar the fund receives in income Vanguard used to use 20 cents to run the fund, and I got to keep 80 cents. Now if the cost has gone down to 16 cents, I will get to keep 84 cents of every gross dollar of income. If I reinvest the interest, I got 0.80 new shares before and will get 0.84 new shares after the cost decrease for every dollar of gross interest income. I'm missing how this will affect the NAV, which I would expect to, as you point out, stay at $1 per share. In any event that's how I've been looking at it, but I'm always open to fixing my conceptual mistakes.
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Re: cheaper money market funds

Postby rustymutt » Sat Dec 29, 2012 6:54 am

umfundi wrote:
asset_chaos wrote:I don't recall seeing an announcement of this, but I logged on to Vanguard just now, and there was a note on my balance and holdings page that the cost of Prime money market fund had dropped to 16 bp from 20 bp. My only question is have cash rates dropped again so that Vanguard has to do something to keep the net-of-cost interest rate above zero, or should I be looking forward to Prime's rate increasing to a whopping 0.08% pa? In any event, kudos to Vanguard for continuing to lower costs.

Let me see.

The ER is 0.20%. My NAV is $1.00.

The ER is 0.16%. My NAV is $1.00.

How is the ER on a money market fund at all relevant?

(My NAV is $1.00. I don't care how they get there.)

Keith


Your joking right?
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Re: cheaper money market funds

Postby Call_Me_Op » Sat Dec 29, 2012 7:33 am

umfundi wrote:
asset_chaos wrote:I don't recall seeing an announcement of this, but I logged on to Vanguard just now, and there was a note on my balance and holdings page that the cost of Prime money market fund had dropped to 16 bp from 20 bp. My only question is have cash rates dropped again so that Vanguard has to do something to keep the net-of-cost interest rate above zero, or should I be looking forward to Prime's rate increasing to a whopping 0.08% pa? In any event, kudos to Vanguard for continuing to lower costs.

Let me see.

The ER is 0.20%. My NAV is $1.00.

The ER is 0.16%. My NAV is $1.00.

How is the ER on a money market fund at all relevant?

(My NAV is $1.00. I don't care how they get there.)

Keith


I guess, then, you don't care about how much interest is paid by your money market fund?
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Re: cheaper money market funds

Postby umfundi » Sat Dec 29, 2012 9:21 am

Sorry, my mistake.

Keith :oops:
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Re: cheaper money market funds

Postby claimui » Sat Dec 29, 2012 9:34 am

To be fair, you might not care because the interest being paid is abysmally low in either situation. In other words:

The ER is 0.20%. My yield is almost 0%.

The ER is 0.16%. My yield is still almost 0%.

Vanguard Prime Money Market Fund currently reports a yield of 0.03%. Assuming the lower ER directly translates into 0.04% yield, now we can look forward to a return of 0.07%. Hooray. It does seem relatively meaningless when you can get 13+ times more yield *and* FDIC insurance with a savings account at Ally Bank or similar.

Most of my cash needs are either in higher yielding savings accounts, short term bond funds like Vanguard Short-Term Tax-Exempt Fund Admiral Shares (VWSUX -- unfortunate ticker symbol), or pretty much anything else except the money market fund.
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Re: cheaper money market funds

Postby Call_Me_Op » Sat Dec 29, 2012 2:32 pm

claimui wrote:To be fair, you might not care because the interest being paid is abysmally low in either situation. In other words:

The ER is 0.20%. My yield is almost 0%.

The ER is 0.16%. My yield is still almost 0%.


You can also view it as a 20% reduction in return.
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Re: cheaper money market funds

Postby Rob5TCP » Sat Dec 29, 2012 4:34 pm

These low yields won't be around forever. The direction in lowering the expense will eventually produce results.
With some money market funds having had expense percentages as high as 1% (in the past), Vanguard will
have the distinct advantage when rates get back to a new normal. Whatever and whenever that is.

For now, I keep most of my short spare funds in FDIC insured mmkts and CD's.
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