Is VUSXX Really Safer Than FDIC Insured Bank Account?

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Modeone
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Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Modeone »

I've read several posts on the forum where members have stated that Vanguard Treasury Money Market Fund (VUSXX) would be as safe or safer than an FDIC insured bank account (or credit union) because the fund holds US gov't securities. Some have stated this is safer and less risky than relying on FDIC insurance. Thoughts?

I have 70K + sitting in commercial bank earning no interest (I won't go into my reasons for holding this now) but would much prefer to park it in my taxable acct. with Vanguard where I also have all my and spouse's IRA's. Just wanted to run this by the forum before I make the jump. Would certainly be more convenient for me to be in VUSXX & exempt from state tax as well.

Thank you!
ziggny
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by ziggny »

If you really don't trust a money market fund, then open an account at [Ally/Marcus/AmEx/online high yield savings account of your choice]. Rates are dropping, but the current 1.9% rate is better than the 0 you're getting now.
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RickBoglehead
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by RickBoglehead »

My thoughts are that it's not worth even thinking about. While I do try to make sure that my bank balances don't exceed FDIC limits, I don't worry about if they do a bit. Nor do I worry about Vanguard's MM funds breaking the dollar.
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Modeone
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Modeone »

ziggny wrote: Tue Oct 15, 2019 8:56 am If you really don't trust a money market fund, then open an account at [Ally/Marcus/AmEx/online high yield savings account of your choice]. Rates are dropping, but the current 1.9% rate is better than the 0 you're getting now.
Thank you. I'm well aware of online high yield savings accounts but not interested in opening one of them. In general it's not that I don't trust money market funds, but more that I'm feeling distrustful of the banking system in general.
rkhusky
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by rkhusky »

By safer, I assume you mean less chance of losing principal. In that regard, both FDIC and Treasuries are very safe. And scenarios where you lose principal involve catastrophic collapses of the financial sector, where your cache of food, water and bullets become important.
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anon_investor
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by anon_investor »

Modeone wrote: Tue Oct 15, 2019 12:48 pm
ziggny wrote: Tue Oct 15, 2019 8:56 am If you really don't trust a money market fund, then open an account at [Ally/Marcus/AmEx/online high yield savings account of your choice]. Rates are dropping, but the current 1.9% rate is better than the 0 you're getting now.
Thank you. I'm well aware of online high yield savings accounts but not interested in opening one of them. In general it's not that I don't trust money market funds, but more that I'm feeling distrustful of the banking system in general.
Since you already have a Vanguard account, then just transferring your cash to VUSXX won't be too much hassle for you. The current 1.88% yield is exempt from state income tax (due to interest coming from US treasuries), so depending on whether you are subject to state income tax, it may be higher than the current interest offered at many online banks. Because the underlying investments in VUSXX are US treasury bills, the US government would need to default in order for you to lose any money, so... there may be bigger problems than you losing principal if the US government defaulted.

Since you said you distrust the banking system in general, you can stop giving them a free loan by holding $70k+ earning 0 interest at a commercial bank...
Northern Flicker
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Northern Flicker »

Because it invests 100% in securities backed by the full faith and credit of the US treasury, VUSXX has the the same credit risk as a deposit account insured by the FDIC or NCUA.

From a practical perspective, banks and credit unions set their rates as a business decision. They want to manage liquidity in a manner that delivers maximum value to their stockholders (if a bank) or members (if a credit union). Yields on money market mutual funds are driven by the capital markets and expenses of the funds. A bank offering a high yield FDIC-insured deposit account may change its rate at any time for arbitrary reasons having to do with the institution’s business. They may advertise a teaser rate and lower it 6 months later.

Looking at it from an extreme tail risk perspective, nobody knows how things would play out if there were to be a default by the US treasury, or high risk of one. Differences in the process of settling matters in adverse circumstances are where the differences will be.

During the savings and loan crisis, the FSLIC was overwhelmed, and it sometimes took months to sort out the status of a failed S&L. During that time, assets were frozen, and no interest was paid on deposits. The process may be more streamlined now, and perhaps the risk of that has been mitigated, but that may just have to do with differences in the rate of failures. If there were widespread failures, the process may be less streamlined. But contractually, the FDIC and NCUA only guarantee your principal, not interest payments from when an institution fails up to the point at which you get your principal back. T-bills contractually guarantee principal and interest.

If there were an actual default by the US treasury, it is anyone’s guess how the haircut taken by t-bill investors would compare in size to that taken by bank depositors.

VUSXX has a $50K minimum. There are other treasury money funds that have low minimums, but they have higher expense ratios and thus lower yields.
Last edited by Northern Flicker on Tue Oct 15, 2019 4:19 pm, edited 1 time in total.
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gmaynardkrebs
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by gmaynardkrebs »

Understanding the FDIC coverage rules is not as easy as I thought, and I could see people making a mistake. But with $70K, it's not a concern. Both FDIC insured accounts and VUSXX are the safest credits on Earth IMO, with the trivial exception of holding Treasury securities directly via TD.
alex_686
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by alex_686 »

gmaynardkrebs wrote: Tue Oct 15, 2019 1:44 pm Understanding the FDIC coverage rules is not as easy as I thought, and I could see people making a mistake. But with $70K, it's not a concern. Both FDIC insured accounts and VUSXX are the safest credits on Earth IMO, with the trivial exception of holding Treasury securities directly via TD.
People who argue that VUSXX is safer point out that FDIC is a insurance company and it finite resources to bail out the banks. There is a ongoing debate if its reserves are large enough and if it charges enough in the way of insurance. On the other hand, VUSXX has the the government and its printing press behind it.

Technically this is true. While the FDIC is a federally created company there is no explicit government behind it. However, I personally think that things would really have to melt down for the government to let the FDIC fail. So I don't buy into this argument.
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Iridium
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Iridium »

Modeone wrote: Tue Oct 15, 2019 8:55 am I've read several posts on the forum where members have stated that Vanguard Treasury Money Market Fund (VUSXX) would be as safe or safer than an FDIC insured bank account (or credit union) because the fund holds US gov't securities. Some have stated this is safer and less risky than relying on FDIC insurance. Thoughts?
As long as you have <$250K, then they are essentially the same. If I was one of the posters that you saw make the claim that VUSXX was safer, please note that I was speaking only for funds that exceed FDIC limits.
JackoC
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by JackoC »

Modeone wrote: Tue Oct 15, 2019 12:48 pm
ziggny wrote: Tue Oct 15, 2019 8:56 am If you really don't trust a money market fund, then open an account at [Ally/Marcus/AmEx/online high yield savings account of your choice]. Rates are dropping, but the current 1.9% rate is better than the 0 you're getting now.
Thank you. I'm well aware of online high yield savings accounts but not interested in opening one of them. In general it's not that I don't trust money market funds, but more that I'm feeling distrustful of the banking system in general.
If you don't trust 'the banking system in general' in some way that includes money market mutual funds in the distrust, why would you do either a bank account or MM mutual fund?

A practical view would IMO say FDIC insured deposits and T-bill MM mutual funds like VUSXX are both very safe, and not much point in debating which is slightly safer. It's more about rates and different tax treatment (VUSXX interest not state taxable, bank account interest is).

If proceeding to the angels dancing on heads of pins debate about them I'd say FDIC insured deposits are very slightly safer because you also have the *bank's* promise to repay you and not all banks would fail just because the US govt defaulted (many might, but they wouldn't all do so automatically). Angels dancing in the other direction, some people argue that Congress and the executive have a tiny bit more wiggle room to not fulfill their stated obligation to the FDIC than not to pay govt debt. I go more with the first idea, but negligible for practical purposes in the current environment for investments you can redeem tomorrow if you get worried.

What things you believe are going on right now, that I can't see, that might make one or the other a *significantly* higher risk I think you'd have to explain further.
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Pigeye Brewster »

https://www.fdic.gov/deposit/deposits/faq.html

Q: What is the FDIC?

A: The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects you against the loss of your insured deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Grt2bOutdoors »

Pigeye Brewster wrote: Tue Oct 15, 2019 2:27 pm https://www.fdic.gov/deposit/deposits/faq.html

Q: What is the FDIC?

A: The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects you against the loss of your insured deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.
Backed by the full faith and credit of the United States government. The key words missing are "a direct obligation of the United States government". A creditor of the United States government gets paid first, everyone else stand in line. That is the difference between securities issued by the United States Treasury and insurance fund provided by the FDIC which relies on Congress for authorization to pay in the event there is a shortfall in the insurance fund.

While true, most people should not be concerned about the ability for FDIC insurance to pay, the OP here is looking for a higher yield. The next best place are certificates of deposit or US Treasury only money funds.
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by MotoTrojan »

I'd wager yes, but in the same way that wearing a helmet while sitting in a grassy field with no trees is safer than not wearing one.

If VUSXX is most convenient for you and maybe even has a better after-tax yield, it is a great choice.
JackoC
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by JackoC »

Grt2bOutdoors wrote: Tue Oct 15, 2019 2:39 pm Backed by the full faith and credit of the United States government. The key words missing are "a direct obligation of the United States government". A creditor of the United States government gets paid first, everyone else stand in line. That is the difference between securities issued by the United States Treasury and insurance fund provided by the FDIC which relies on Congress for authorization to pay in the event there is a shortfall in the insurance fund.
Congress can decide to pay anyone first or make anyone stand in line per its power from Article 1 of the Constitution. There is no explicit mechanism in the Constitution putting that decision above Congress. The statement in the 14th Amendment "The validity of the public debt of the United States…shall not be questioned” can be interpreted either as what was actually intended (to clarify that the reunited country was on the hook for debts the Union incurred during the Civil War) or irrelevant ('we're not saying the debt isn't ours, we're just saying we can't can't/won't pay in full'). IOW that clause's effect is murky at best wrt to the complete discretion of Congress implied by Article 1.

I would therefore say the hierarchy of creditworthiness of VUSXX v FDIC insured deposits credit risk is at best, for VUSXX, ambiguous. I'd personally give FDIC insured deposits the (very) slight nod. Because:
-the bank is also promising to pay you, and all banks wouldn't necessarily fail just because the US federal govt defaulted, although many might depending on the circumstances (a 'real' v 'technical' default, etc)
-*IF* Congress were ever forced to decide who 'stands in line', which again I believe they have the power to do, there would be intense pressure to protect 'small investors', as in FDIC insured depositors. Treasury holders weighted by $ are mainly 'fat cats' and 'foreigners'. Obviously there would be very bad collateral economic consequences to haircutting any holders of US debt. But *IF* Congress ever had to choose who to pay I'd rather be in with the small investors than the fat cats.

To reiterate at risk of redundancy, 'same credit risk' is the every day practical answer IMO for FDIC insured demand deposits v VUSXX, even if one would debate my points about unlikely scenario's. Even if one introduces the risk of malfeasance at the MM fund, not a problem with the assets, which isn't necessarily covered by anybody. Whereas the FDIC gtee covers any reason the bank can't pay including malfeasance. Still a small difference, I just challenge that it's necessarily in favor of VUSXX (which I invest in, btw).
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Northern Flicker »

I think a deposit account has stronger protection than a mutual fund in cases of electronic wire fraud, with consumer liability limited by Federal Reserve Regulation E to $50/incident.
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Modeone
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Modeone »

anon_investor wrote: Tue Oct 15, 2019 1:04 pm
Modeone wrote: Tue Oct 15, 2019 12:48 pm
ziggny wrote: Tue Oct 15, 2019 8:56 am If you really don't trust a money market fund, then open an account at [Ally/Marcus/AmEx/online high yield savings account of your choice]. Rates are dropping, but the current 1.9% rate is better than the 0 you're getting now.
Thank you. I'm well aware of online high yield savings accounts but not interested in opening one of them. In general it's not that I don't trust money market funds, but more that I'm feeling distrustful of the banking system in general.
. . . so depending on whether you are subject to state income tax, it may be higher than the current interest offered at many online banks.

Since you said you distrust the banking system in general, you can stop giving them a free loan by holding $70k+ earning 0 interest at a commercial bank...
Good point re: state income taxes. Thanks!
pyld76
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by pyld76 »

If there ever comes a point where this becomes anything more than an academic exercise on the internet (that is to say, either FDIC/NCUA insurance or treasuries ceases to be backed in full by the US Federal Government), this choice is going to be the least of your problems. Because if the government for whatever reason let either one lose value, the societal discord to follow will quickly switch the discussion to "what is the most effective ammo with which to borrow food/water from recalcitrant neighbors?"

I have no hesitation to hold cash at my credit union in checking/money market/CDs, T-Bills of 4/8/13 week duration (due to their liquidity), VMFXX or VUSXX. Of those, the Treasuries themselves might cost you a penny if you needed to liquidate before maturity. Periodically (when bills or CDs I might have) are coming due, I take a look and see where to best shuffle the cash, but within the construct of "safety" I lose no sleep over any of them.
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by bradinsky »

I believe joint accounts at FDIC participating banks are insured for $250K per account owner. Therefore, a couple could have $500K in a single account, and the full amount would be insured. Rest assured, if our banking system should ever fail, you shouldn’t expect Vanguard, Schwab or Fidelity to be in any better shape. Guns, bullets & ammunition will then be the hot ticket!
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Northern Flicker »

Rest assured, if our banking system should ever fail, you shouldn’t expect Vanguard, Schwab or Fidelity to be in any better shape.
This logic comes up alot. Another common form is: if asset X or institution Y fails, then we have bigger problems.

I consider this to be inverted logic. When there is widespread deep financial duress is precisely when we need safe assets to hold up, and if we ever end up in that place, we might then learn if there is a difference between the safety of t-bills and FDIC insurance.

The assets held by a mutual fund are not part of the fund provider's balance sheet. What sort of shape Vanguard, Schwab, or Fidelity might be in is a separate question from the market value of assets in a money market fund they manage.
Last edited by Northern Flicker on Tue Oct 15, 2019 8:16 pm, edited 1 time in total.
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aspiringboglehead
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by aspiringboglehead »

One thing that's often missed in these debates is that to lose FDIC-insured funds in a bank account, two things need to happen: (1) the bank needs to fail and (2) the US government needs to fail to pay its obligations. To lose money in a Treasury bill (or a collection of them), only the latter needs to happen. The bank, in other words, serves as an extra guarantor of your funds, so the bank account is safer (or at least "no less safe") as a logical matter.

This isn't legal advice, but there is currently no legal difference between "direct obligation of the US government" and "full faith and credit of the US government." The only difference is political in the event the US government decides not to pay its obligations.
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by Kevin M »

Yes, I consider VUSXX as safe as an FDIC-insured bank account. Also, due to the state tax exemption, your taxable-equivalent yield (TEY) might be higher than many of the higher-yielding bank accounts. At my marginal tax rates of 27% fed and 8% state, my compound TEY for VUSXX at 1.88% SEC yield is 2.13%. Highest savings account yield I see at DepositAccounts (for accounts without a gimmick) is 2.40% APY, offered by three banks, but it's likely that you'll have to keep switching banks to always get the highest rate.

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JackoC
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Re: Is VUSXX Really Safer Than FDIC Insured Bank Account?

Post by JackoC »

Northern Flicker wrote: Tue Oct 15, 2019 6:57 pm
Rest assured, if our banking system should ever fail, you shouldn’t expect Vanguard, Schwab or Fidelity to be in any better shape.
This logic comes up alot. Another common form is: if asset X or institution Y fails, then we have bigger problems.

I consider this to be inverted logic. When there is widespread deep financial duress is precisely when we need safe assets to hold up, and if we ever end up in that place, we might then learn if there is a difference between the safety of t-bills and FDIC insurance.

The assets held by a mutual fund are not part of the fund provider's balance sheet. What sort of shape Vanguard, Schwab, or Fidelity might be in is a separate question from the market value of assets in a money market fund they manage.
I agree, excellent point. The 'you'd have bigger things to worry about' logic is a) the wrong way around and b) not even necessarily true. Plenty of countries have defaulted* on their debt, including debt issued in their own currency and life basically went on within those countries, they didn't become failed states.

I also agree the difference is speculative in terms of my second point above about FDIC advantage over T-bills. We don't know who Congress would prioritize in the unlikely case everyone wasn't paid on time and in full. But they can decide that. I think FDIC depositors would have the advantage (again paralleling cases where other govt's tried to protect mom and pop depositors and stiff 'fat cats and foreigners'). Others can disagree, we'll probably never find out. OTOH it's an objective fact that govt insured deposits are gteed by both the issuing bank and the govt, and govt debt only by the govt.

Also again a mutual fund like VUSXX has its own minute risks of mismanagement/malfeasance at Vanguard which isn't explicitly back stopped by anybody (SIPC would cover eg. misappropriation of your VUSXX shares from a VBS account, but not AFAIK malfeasance *at* the fund). I'm willing to take that risk if VUSXX after tax return is a few bps higher than bank, counting the effort, and also risks (xferring money around, giving your personal info out, etc) of switching bank accounts constantly to stay ahead of VUSXX's rate. But there is also a very small, IMO, additional risk there.

*'default' is a legal term which unlike the difference between 'full faith and credit' and 'direct obligation' is actually relevant. Congress decides who to pay first. But 'default' is defined by ratings agencies. 'Default' doesn't necessarily mean 'who are you? I don't owe you anything'. It would also include 'technical' political shenanigans that went too far, and delayed payments for some considerable period of political stalemate. It also includes 'we're paying back every penny, but here are these lower rate longer term bonds in (forced) exchange (which the market says are worth less) to ease us through the crisis'. It's not necessarily some Chicxulub meteor event. The US federal govt defaulting is IMO a very small risk, not a nano risk. And all banks would not fail just because it happened in any possible form. In some scenario's maybe no banks would fail just because of a US govt default, depends the exact situation. And banks that don't fail still have to pay off their depositors.
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