My Highest ER Fund = Prime MM. WTH?

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watchnerd
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My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

I sorted my funds today by ER and realized something I never noticed before:

VTI, US TSM = .03
VEA, ex-US TSM = .05
VTIP, Short TIPS = .05
VGLT, Long Treasuries = .05
VWO, Emerging Markets = .12
VMMXX, Prime Money Market = .16


My most expensive fund isn't one of my stock or bond funds, not even my emerging markets fund.....it's my money market fund.

I'm completely scratching my head how the fund that would seem to be the simplest of them has the highest ER.

What explains this?
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Re: My Highest ER Fund = Prime MM. WTH?

Post by Iridium »

The money market fund has to find opportunities to reinvest 2+% of its assets every day, as the old assets mature. Worse, there isn't an index that it can blindly follow, managers have to evaluate investment opportunities, while ensuring that their portfolios meet all the requirements around daily and weekly liquidity.

My intuition is that money markets are tough to keep going, whereas one an equity or bond fund has gotten through its first few months, it is largely on auto pilot: making relatively small perscribed trades every day to balance net flow into the fund and only changing portfolio constituents on a quarterly basis.

Edit: also, it looks like everything you listed as a 'fund' is actually an ETF. With an ETF, the manager doesn't even have to manage fund flow. I honestly have no idea what ETF managers do between quarterly index reconstitutions.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

Iridium wrote: Fri Feb 07, 2020 1:47 am The money market fund has to find opportunities to reinvest 2+% of its assets every day, as the old assets mature. Worse, there isn't an index that it can blindly follow, managers have to evaluate investment opportunities, while ensuring that their portfolios meet all the requirements around daily and weekly liquidity.

My intuition is that money markets are tough to keep going, whereas one an equity or bond fund has gotten through its first few months, it is largely on auto pilot: making relatively small perscribed trades every day to balance net flow into the fund and only changing portfolio constituents on a quarterly basis.
This can't be an active, humanly managed process.

I thought this was just part of the automated, overnight lending in T-bills, commercial paper and between banks.

Here is what Prime MM lists as the portfolio:

Bankers Acceptances
Certificates of Deposit
Other
Repurchase Agreements
U.S. Commercial Paper
U.S. Govt. Obligations
U.S. Treasury Bills
Yankee/Foreign

T-bills and Yankee combined are 82.9%

What you're describing sounds more like an ultra-short bond like VUBFX, to me.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by lexor »

watchnerd wrote: Fri Feb 07, 2020 1:31 am I sorted my funds today by ER and realized something I never noticed before:

VTI, US TSM = .03
VEA, ex-US TSM = .05
VTIP, Short TIPS = .05
VGLT, Long Treasuries = .05
VWO, Emerging Markets = .12
VMMXX, Prime Money Market = .16


My most expensive fund isn't one of my stock or bond funds, not even my emerging markets fund.....it's my money market fund.

I'm completely scratching my head how the fund that would seem to be the simplest of them has the highest ER.

What explains this?
Use a savings account or no penalty CDs instead
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

lexor wrote: Fri Feb 07, 2020 2:21 am

Use a savings account or no penalty CDs instead
That wasn't the question.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by lexor »

watchnerd wrote: Fri Feb 07, 2020 2:27 am
lexor wrote: Fri Feb 07, 2020 2:21 am

Use a savings account or no penalty CDs instead
That wasn't the question.
I'm not sure exactly sure - I would think 1 factor would be all the money moving in and out. Money markets also aren't tracking an index so presumably they require active management

I suggested using a better product with FDIC insurance, higher yields and no expense ratio because you mentioned the expense ratio specifically. See https://www.depositaccounts.com/
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Re: My Highest ER Fund = Prime MM. WTH?

Post by MIretired »

My guess id it's turnover and cash flows. has 36 day avg. maturity. Does that mean almost 1200% turnover? I looked up yankee/foreign investments. Wikipedia says foreign companies and banks. If you look on VG site for the fund, under portfolio/management, it looks like maybe 3% net in/ or out investment flows daily.

past thread:
viewtopic.php?f=1&t=294104

:sharebeer
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

MIretired wrote: Fri Feb 07, 2020 3:39 am My guess id it's turnover and cash flows. has 36 day avg. maturity. Does that mean almost 1200% turnover? I looked up yankee/foreign investments. Wikipedia says foreign companies and banks. If you look on VG site for the fund, under portfolio/management, it looks like maybe 3% net in/ or out investment flows daily.

past thread:
viewtopic.php?f=1&t=294104

:sharebeer
And yet the Fed Money Market Fund, the default settlement account, has quite a bit lower ER = 0.11.

Although that might be helped by AUM given its the default settlement choice.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by UpperNwGuy »

Brokers make money from their money market funds. Check out the ERs on Fidelity's money market funds. Vanguard looks good by comparison.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

UpperNwGuy wrote: Fri Feb 07, 2020 7:50 am Brokers make money from their money market funds. Check out the ERs on Fidelity's money market funds. Vanguard looks good by comparison.
So your thesis is that it's not high because its necessary by virtue of churn or holdings, but simply because they can get away with it?
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Re: My Highest ER Fund = Prime MM. WTH?

Post by retiringwhen »

So, try this, look around at all the fund complexes and try to find a Prime Money Market fund that has an ER even close to 0.16%. Next look around at any all fund complexes and try to find a Federal or Treasury Money Market that has a lower ER than Vanguard's Prime.

Next look around at SEC Yields for High Yield Savings Accounts that provide sustained (not promotional) rates equivalent to Prime (Remember Prime does get a somewhat favorable state tax treatment for many investors).

Now ask yourself which may be true?

A.) There is not enough Competition for Vanguard to be forced to lower the ER for VMMXX since the rest of the industry essentially uses cash as their profit center.
B.) Money Market Funds (especially Prime funds that invest in commercial and Yankee paper) are one of the more expensive and difficult funds to operate.

No fair comparing funds that have $100,000 or $1,000,000 minimum investments. Compare apples to apples. VMMXX has a $3,000 opening balance requirement.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by informal guide »

watchnerd wrote: Fri Feb 07, 2020 1:31 am I sorted my funds today by ER and realized something I never noticed before:

VTI, US TSM = .03
VEA, ex-US TSM = .05
VTIP, Short TIPS = .05
VGLT, Long Treasuries = .05
VWO, Emerging Markets = .12
VMMXX, Prime Money Market = .16


My most expensive fund isn't one of my stock or bond funds, not even my emerging markets fund.....it's my money market fund.

I'm completely scratching my head how the fund that would seem to be the simplest of them has the highest ER.

What explains this?
I think it is likely that money market funds have a much higher number of transactions each year per 1000 accounts both at the client and the security level than equity or bond funds. Processing those transactions, both at the customer and the security levels, incurs real costs, that are figured into the expense ratio.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by JoMoney »

It's also a very high turnover actively managed fund.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by mtmingus »

I hold

JPST JPMorgan Ultra Short Term Bnd
MINT PIMCO Ultra Short Term Bnd
FPAXX Fidelity Gov MM
VMMXX Vanguard Prime MM

for my ultra short term/cash.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by UpperNwGuy »

watchnerd wrote: Fri Feb 07, 2020 7:58 am
UpperNwGuy wrote: Fri Feb 07, 2020 7:50 am Brokers make money from their money market funds. Check out the ERs on Fidelity's money market funds. Vanguard looks good by comparison.
So your thesis is that it's not high because its necessary by virtue of churn or holdings, but simply because they can get away with it?
Yes.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

mtmingus wrote: Fri Feb 07, 2020 9:04 am I hold

JPST JPMorgan Ultra Short Term Bnd
MINT PIMCO Ultra Short Term Bnd
FPAXX Fidelity Gov MM
VMMXX Vanguard Prime MM

for my ultra short term/cash.
Sorry...I'm not getting the connection to the topic?
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Re: My Highest ER Fund = Prime MM. WTH?

Post by anon_investor »

watchnerd wrote: Fri Feb 07, 2020 9:43 am
mtmingus wrote: Fri Feb 07, 2020 9:04 am I hold

JPST JPMorgan Ultra Short Term Bnd (ER 0.18%)
MINT PIMCO Ultra Short Term Bnd (ER 0.36%)
FPAXX Fidelity Gov MM (think he meant SPAXX, ER 0.42%)
VMMXX Vanguard Prime MM (ER 0.16%)

for my ultra short term/cash.
Sorry...I'm not getting the connection to the topic?
Go look at the ER's for those funds compared to VMMXX...
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

anon_investor wrote: Fri Feb 07, 2020 10:11 am
watchnerd wrote: Fri Feb 07, 2020 9:43 am
mtmingus wrote: Fri Feb 07, 2020 9:04 am I hold

JPST JPMorgan Ultra Short Term Bnd (ER 0.18%)
MINT PIMCO Ultra Short Term Bnd (ER 0.36%)
FPAXX Fidelity Gov MM (think he meant SPAXX, ER 0.42%)
VMMXX Vanguard Prime MM (ER 0.16%)

for my ultra short term/cash.
Sorry...I'm not getting the connection to the topic?
Go look at the ER's for those funds compared to VMMXX...
I see you added the ERs, thank you.

But showing others are high doesn't explain why they're high.

Also, a bunch of those aren't MM funds.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by retiringwhen »

I gave you a framework to try and answer the question, the above observation about ER's supports one of those possibilities.

I also suggest you read about just how much money Schwab makes on cash deposits.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

retiringwhen wrote: Fri Feb 07, 2020 10:17 am I gave you a framework to try and answer the question, the above observation about ER's supports one of those possibilities.

I also suggest you read about just how much money Schwab makes on cash deposits.

I guess I don't consider either one of those to be prima facie evidence of your hypothesis that applies specifically to VMMXX, especially given the ER delta.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

JoMoney wrote: Fri Feb 07, 2020 8:49 am It's also a very high turnover actively managed fund.
Since the ER for the Fed and Treasury MMs are lower, perhaps they're not active.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by retiringwhen »

watchnerd wrote: Fri Feb 07, 2020 10:29 am
JoMoney wrote: Fri Feb 07, 2020 8:49 am It's also a very high turnover actively managed fund.
Since the ER for the Fed and Treasury MMs are lower, perhaps they're not active.
They are active, KevinM did a lot of analysis of their behavior last year, they make bets on interest rates all the time and they change the components mixtures regularly based on those bets. I just think the transaction costs in the Gov't bond markets are lower.

Besides by definition a passive fund requires an index to use as a benchmark and instruction on WHAT to hold. No index exists for any money market segment (which may be a hint on the complexity of the market itself).

The irony is that when choosing a money market, there is really only two decisions to make ,Treasuries or not, and then pick the lowest ER fund if you want good returns. The fact that many billions of $ sit in low yielding high ER funds tells me the market has inefficiencies caused by either behavioral issues, lack of transparency or possibly intangible perceived value (aka CMA accounts, etc.).

This market is not purely cost efficient otherwise you would be able to find a bunch of MM funds with ER near 0.16%.

The fact that the Fidelity's Prime Money Market sits at 0.42% is a strong hint at that. They are probably the closest in business model to Vanguard of all the mark Fund Complexes and Brokerages and they are not pressured to lower an ER that is nearly 3x Vanguard for the same fund says alot.

Edit: BTW, I did not add in the real factor of tax-treatment for a fund to decide what is best, but that is tangential to the ER discussion.
Last edited by retiringwhen on Fri Feb 07, 2020 10:51 am, edited 1 time in total.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by increment »

According to the 2019 annual report, at the end of August the Prime MMF held about twice as many investments as the Federal MMF, and about ten times as many as the Treasury MMF. This may be a factor.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by anon_investor »

My conclusion, despite its 0.16% ER, VMMXX (Vanguard Prime Money Market Fund) generally offers superior yield to any and all currently available money market fund options (an an absolute basis). If taxes are factored in, some treasury or municipal money market funds may have a superior after-tax yield.

I would NOT get hung up too much on the 0.16% ER. It is actually lower than most other money market funds offered outside of Vanguard. You should worry more about the actual yield you are getting.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by Broken Man 1999 »

We have Vanguard Federal Money Market Funds, and no other MMF, as I like to have as few moving parts as is possible.

I don't worry about the ER, as our Vanguard Federal Money Market Funds are used for only transactions of moving funds to and from Vanguard. Given that role, there is seldom any amount in them to care about.


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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

Broken Man 1999 wrote: Fri Feb 07, 2020 11:43 am We have Vanguard Federal Money Market Funds, and no other MMF, as I like to have as few moving parts as is possible.

I don't worry about the ER, as our Vanguard Federal Money Market Funds are used for only transactions of moving funds to and from Vanguard. Given that role, there is seldom any amount in them to care about.


Broken Man 1999
Oh, I'm not worried about the ER. It's the yield that counts.

It just seemed counter-intuitive for the 'cash' asset to have the highest ER, and not so obvious as to why it would be so.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by sycamore »

I've wondered why VMMXX has a relatively high ER.

Compare it to Vanguard's active intermediate-term muni bond fund VWITX (Investor class) and VWIUX (Admiral class)

Code: Select all

ticker                 VMMXX   VWITX    VWIUX
expense ratio           0.16    0.17     0.09
#holdings                401    9269     9269
share class assets   $107.4b   $3.7b   $69.9b
The muni fund has an order of magnitude more holdings, which presumably means higher expenses (to review/approve all those muni bonds for inclusion into the fund). Yet even the investor class VWITX is only 1 basis point more.

Maybe the market market management team (personnel) have special skills that demands higher compensation and thus a higher ER?

Or maybe there's greater regulatory costs associated with a money market fund?
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Re: My Highest ER Fund = Prime MM. WTH?

Post by jhfenton »

lexor wrote: Fri Feb 07, 2020 2:59 am I suggested using a better product with FDIC insurance, higher yields and no expense ratio because you mentioned the expense ratio specifically. See https://www.depositaccounts.com/
It makes sense to compare the yields and weigh the value of the FDIC insurance.

But it is meaningless to say that bank accounts have no expense ratio. That is literally true, because they don't report an "expense ratio." But banks certainly have expenses that factor into the yield that they choose to pay. They just don't have to tell you what they are.

And that leaves you comparing the yields and weighing the value of the FDIC insurance.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by lexor »

jhfenton wrote: Fri Feb 07, 2020 12:43 pm
lexor wrote: Fri Feb 07, 2020 2:59 am I suggested using a better product with FDIC insurance, higher yields and no expense ratio because you mentioned the expense ratio specifically. See https://www.depositaccounts.com/
It makes sense to compare the yields and weigh the value of the FDIC insurance.

But it is meaningless to say that bank accounts have no expense ratio. That is literally true, because they don't report an "expense ratio." But banks certainly have expenses that factor into the yield that they choose to pay. They just don't have to tell you what they are.

And that leaves you comparing the yields and weighing the value of the FDIC insurance.
Do yields posted on broker websites include the expense ratio costs already
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Re: My Highest ER Fund = Prime MM. WTH?

Post by retired@50 »

lexor wrote: Fri Feb 07, 2020 1:20 pm
jhfenton wrote: Fri Feb 07, 2020 12:43 pm
lexor wrote: Fri Feb 07, 2020 2:59 am I suggested using a better product with FDIC insurance, higher yields and no expense ratio because you mentioned the expense ratio specifically. See https://www.depositaccounts.com/
It makes sense to compare the yields and weigh the value of the FDIC insurance.

But it is meaningless to say that bank accounts have no expense ratio. That is literally true, because they don't report an "expense ratio." But banks certainly have expenses that factor into the yield that they choose to pay. They just don't have to tell you what they are.

And that leaves you comparing the yields and weighing the value of the FDIC insurance.
Do yields posted on broker websites include the expense ratio costs already
Yes. The posted yield is what you get. In industry lingo, the yield is net of expenses.

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Re: My Highest ER Fund = Prime MM. WTH?

Post by aristotelian »

And yet, Vanguard's Prime MM fund beats everyone else's on the market.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by lexor »

aristotelian wrote: Fri Feb 07, 2020 1:32 pm And yet, Vanguard's Prime MM fund beats everyone else's on the market.
Sure but it seems kind of irrelevant when they don't offer any banking features and a bank significantly beats them in yield. Like why would you use it? VG will honor a same day purchase from your bank into a mutual fund

Money markets should be avoided until their interest rates go up
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Re: My Highest ER Fund = Prime MM. WTH?

Post by Dottie57 »

UpperNwGuy wrote: Fri Feb 07, 2020 7:50 am Brokers make money from their money market funds. Check out the ERs on Fidelity's money market funds. Vanguard looks good by comparison.
+1
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Re: My Highest ER Fund = Prime MM. WTH?

Post by aristotelian »

lexor wrote: Fri Feb 07, 2020 1:42 pm
aristotelian wrote: Fri Feb 07, 2020 1:32 pm And yet, Vanguard's Prime MM fund beats everyone else's on the market.
Sure but it seems kind of irrelevant when they don't offer any banking features and a bank significantly beats them in yield. Like why would you use it? VG will honor a same day purchase from your bank into a mutual fund

Money markets should be avoided until their interest rates go up
The reason I use it is that it is a convenient place to hold cash and earn a return comparable to a savings account without the inconvenience of having to open a new account somewhere else.

I am not sure why you would avoid money markets right now. They are actually beating the 10 year Treasury, with (nearly) zero risk to principal.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by jhfenton »

lexor wrote: Fri Feb 07, 2020 1:20 pm
jhfenton wrote: Fri Feb 07, 2020 12:43 pm
lexor wrote: Fri Feb 07, 2020 2:59 am I suggested using a better product with FDIC insurance, higher yields and no expense ratio because you mentioned the expense ratio specifically. See https://www.depositaccounts.com/
It makes sense to compare the yields and weigh the value of the FDIC insurance.

But it is meaningless to say that bank accounts have no expense ratio. That is literally true, because they don't report an "expense ratio." But banks certainly have expenses that factor into the yield that they choose to pay. They just don't have to tell you what they are.

And that leaves you comparing the yields and weighing the value of the FDIC insurance.
Do yields posted on broker websites include the expense ratio costs already
Yes. They are not allowed to post pre-expense yield or return numbers.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by ohai »

Stock funds are subsidized by securities lending. They use this revenue to reduce expense ratios, and can theory, even produce negative expense ratios if they wanted to. Stock expense ratio should be lower than money markets.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by MIretired »

watchnerd wrote: Fri Feb 07, 2020 7:00 am
MIretired wrote: Fri Feb 07, 2020 3:39 am My guess id it's turnover and cash flows. has 36 day avg. maturity. Does that mean almost 1200% turnover? I looked up yankee/foreign investments. Wikipedia says foreign companies and banks. If you look on VG site for the fund, under portfolio/management, it looks like maybe 3% net in/ or out investment flows daily.

past thread:
viewtopic.php?f=1&t=294104

:sharebeer
And yet the Fed Money Market Fund, the default settlement account, has quite a bit lower ER = 0.11.

Although that might be helped by AUM given its the default settlement choice.
My best guess ,comparing these 2 funds, is the 59% of prime in yankee/foreign investments. from wikipedia, yankee is prime lends to foreign companies and banks in US dollars. I presume the foreign in 'yankee/foreign on VG site, is the same foreign investments ,but in foreign currency. So, some exchange rate risk. But these are non-sovereign loans, with less liquidity, or larger spread? This compared to fed mm of all treasuries?
This is an armchair, complete WAG.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by informal guide »

lexor wrote: Fri Feb 07, 2020 1:42 pm
aristotelian wrote: Fri Feb 07, 2020 1:32 pm And yet, Vanguard's Prime MM fund beats everyone else's on the market.
Sure but it seems kind of irrelevant when they don't offer any banking features and a bank significantly beats them in yield. Like why would you use it? VG will honor a same day purchase from your bank into a mutual fund

Money markets should be avoided until their interest rates go up
The difference between Vanguard's 11-16 basis point expenses and Fidelity's 39 basis points goes to pay for the "free" services like ATM withdrawal refunds and bill pay services on Fidelity's money market funds and to earn Fidelity's owners a profit margin. My preference is to get those services from either Fidelity or my local bank and earn the higher yields on Vanguard's money funds for my short term cash.
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Re: My Highest ER Fund = Prime MM. WTH?

Post by lexor »

informal guide wrote: Sat Feb 08, 2020 8:20 am
lexor wrote: Fri Feb 07, 2020 1:42 pm
aristotelian wrote: Fri Feb 07, 2020 1:32 pm And yet, Vanguard's Prime MM fund beats everyone else's on the market.
Sure but it seems kind of irrelevant when they don't offer any banking features and a bank significantly beats them in yield. Like why would you use it? VG will honor a same day purchase from your bank into a mutual fund

Money markets should be avoided until their interest rates go up
The difference between Vanguard's 11-16 basis point expenses and Fidelity's 39 basis points goes to pay for the "free" services like ATM withdrawal refunds and bill pay services on Fidelity's money market funds and to earn Fidelity's owners a profit margin. My preference is to get those services from either Fidelity or my local bank and earn the higher yields on Vanguard's money funds for my short term cash.
I wasn't suggesting to use Fidelity. I was suggesting to use a bank like Marcus, Ally or Discover
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle
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watchnerd
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Re: My Highest ER Fund = Prime MM. WTH?

Post by watchnerd »

lexor wrote: Fri Feb 07, 2020 1:42 pm
Money markets should be avoided until their interest rates go up
Go up to what?

At what point should they not be avoided?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
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