your cash is trash at brokers J.Zweig - WSJ

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EvelynTroy
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your cash is trash at brokers J.Zweig - WSJ

Post by EvelynTroy » Tue Mar 13, 2018 7:41 am

Apologize if already referenced, looked didn't see it. Eye opening article for me - as usual Mr. Zweig looking out for the little guy.

https://blogs.wsj.com/moneybeat/2018/03 ... but-trash/

Summary -
Short-term interest rates have been rising, but the interest customers of brokerage houses have not received commensurate rate increase in their sweep money market type accounts. Mr. Tumin of depositaccounts.com notes banks have also not passed on rate increases in savings accounts.

" brokerage firms stand out for how little they pay on clients’ cash. That’s partly because commissions and trading volume continue to wither. By paying paltry interest on the money they take in and then investing it at market rates, brokers can pocket the difference as a welcome and low-risk source of profit."

They are betting on the laziness of consumers not to shop around to increase their yield. Noted Schwab has even reduced their sweep account rates a tiny amount. Schwab reports this is an "opportunity" for investors to scrutinize and take advantage of better yields with other product. (thought that was amusing).

Comes down to huge amounts of money investors are giving to their brokers -
Assuming the average yield of 0.12% that Crane Data estimates for brokerage sweep accounts, investors would earn an aggregate of only $420 million in income on that money over the next year.
If, instead, investors shopped around to improve their yield and earned an average of 1% on that cash, they would pocket $3.5 billion in income. Overall, then, the cost of that inertia is roughly $3.1 billion.

If you don't shop around for better yields you are effectively handing your broker another 1% a year.

Evelyn
PS - No mention of Vanguard in the article. Also made the summary because its subscription only article. Please excuse any errors I might have made in summarizing.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by EvelynTroy » Tue Mar 13, 2018 7:49 am

Just to add - in the article it was noted Schwab offers Schwab money fund yielding almost 1.3%. There, unlike in a sweep account, she will have to place a separate order to buy or sell some of the fund whenever she wants to reinvest dividends or raise money for a trade.
ev

bberris
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by bberris » Tue Mar 13, 2018 9:06 am

At TDameritrade, there is no longer a short term trading fee on commission free ETFs so you could consider short term bond funds like BIL or FRLN.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by livesoft » Tue Mar 13, 2018 9:13 am

Actually, there is a short-term trading fee on commission-free ETFs at TDAmeritrade. You might be able to get them to waive it with a phone call. Make such a trade and you will see what I mean. But you can own BIL and FLRN and ping-pong if you need to avoid the fee by selling only the ETF you have held more than 30 days.

It has been well-known for a long time that brokerage firms make a lot of money off of clients who keep cash in low-interest accounts. I'll bet that Zweig has written more than half-a-dozen articles on the subject over his career. But it is always good to remind newish investors to the problem.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by dbr » Tue Mar 13, 2018 9:30 am

Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by saver007 » Tue Mar 13, 2018 10:44 pm

Interactive Brokers is the only us broker that I know that pay any decent interest on credit cash balance.. IB pay fed funds rate minus 50 basis point which is about .93 percentage now but should go up as fed raises. IB don't pay any interest for the first 10k and you don't get any interest at all if your total account equity is less than 100k. At least once you qualify for it, interest is accrued right away for any new funds from sale, dividends,etc. No need to sweep or take additional risk of money market funds.

That being said, I like the 1.5%ish interest pay out of the Vanguard prime market funds Which is projected to go up as fed raises and probably will beat most high yield savings accounts in a rising environment. It is not very beneficial to buy this fund from IB as commission is $15 per trade. So my question is Vanguard the only place to buy this fund commission free?

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by lazyday » Tue Mar 13, 2018 11:29 pm

saver007 wrote:
Tue Mar 13, 2018 10:44 pm
Interactive Brokers is the only us broker that I know that pay any decent interest on credit cash balance.
Vanguard will automatically sweep cash into the Federal Money Market fund which has a very nice yield.

At other brokers, I might consider:

VGSH short term Treasuries which isn't cash but pretty low risk,
SHV ultrashort Treasuries which is very liquid, or
VCSH short term corp which is liquid in normal times, but might not trade at fair market value in a panic.

Of course some brokers have other funds that trade free, which might be worth considering too.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by stlutz » Wed Mar 14, 2018 12:09 am

Nite that Fidelity also offers a sweep money market option yielding about 1 percent. Not as good as Vanguard but in second place, I think.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by triceratop » Wed Mar 14, 2018 12:13 am

dbr wrote:
Tue Mar 13, 2018 9:30 am
Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.
Precisely. The lowest-priced ETF in my portfolio is about $30 so that’s the most I ever have in money market. If I used mutual funds the amount would be $0.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by amphora » Wed Mar 14, 2018 1:21 am

Yeah, it's well known that this is a major source of profits for brokerage firms along with margin loans and stock loans. This doesn't bother me much. I prefer for brokers to profit from the spread in sweep accounts than from hidden fees or pushing their own high expense ratio mutual funds. Investors can easily keep very little cash in their brokerage account and avoid significant lost interest. As long as brokers don't intentionally delay transaction clearing, this is fine by me.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by Doc » Wed Mar 14, 2018 9:00 am

triceratop wrote:
Wed Mar 14, 2018 12:13 am
dbr wrote:
Tue Mar 13, 2018 9:30 am
Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.
Precisely. The lowest-priced ETF in my portfolio is about $30 so that’s the most I ever have in money market. If I used mutual funds the amount would be $0.
Don't fees and spreads with using odd lot ETFs for cash management eat your lunch?
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by livesoft » Wed Mar 14, 2018 9:05 am

Doc wrote:
Wed Mar 14, 2018 9:00 am
Don't fees and spreads with using odd lot ETFs for cash management eat your lunch?
I suppose they could, but in practice I find that:

Spreads questions are a red herring. At least I see that my orders are filled on the best side of the spread for me. See, for example, viewtopic.php?p=3826098#p3826098

Odd lot orders for ETFs actually execute at favorable prices compared to round lots in my experience.

And one should use a no-commission broker for all this.

But yes I agree, if one can get a Money Market Fund paying the same yield, then that would be the thing to use.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by Doc » Wed Mar 14, 2018 9:35 am

Thanks, livsoft.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by dkturner » Wed Mar 14, 2018 10:37 am

dbr wrote:
Tue Mar 13, 2018 9:30 am
Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.
I can’t speak for Everyman, but we maintain a significant “cash” balance primarily because we have to take year end RMDs. The distributions are mostly withheld for income taxes. Anything left over is used to make gifts to charity and family members. I doubt that our situation is an unusual one. I thought that money needed within a year shouldn’t be invested in longer term fixed income? We hold the cash in our portfolios because that’s where our IRA assets are held and that way we can wait until December to pay our income taxes. That gives us the use of a six figure balance for a full eleven months, rather than having to make quarterly estimated tax payments.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by dbr » Wed Mar 14, 2018 10:41 am

dkturner wrote:
Wed Mar 14, 2018 10:37 am
dbr wrote:
Tue Mar 13, 2018 9:30 am
Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.
I can’t speak for Everyman, but we maintain a significant “cash” balance primarily because we have to take year end RMDs. The distributions are mostly withheld for income taxes. Anything left over is used to make gifts to charity and family members. I doubt that our situation is an unusual one. I thought that money needed within a year shouldn’t be invested in longer term fixed income? We hold the cash in our portfolios because that’s where our IRA assets are held and that way we can wait until December to pay our income taxes. That gives us the use of a six figure balance for a full eleven months, rather than having to make quarterly estimated tax payments.
Income taxes are just part of total annual expenses. One would cover that from income sources such as SS, pensions, and then withdrawals from a portfolio at some miniscule rate of a few percent. There is no reason not to hold the portfolio fully invested according to the asset allocation chosen.

If people want to mentally account pieces of cash piece by piece and apply bad thinking about fixed income, then that is not really particularly harmful either.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by triceratop » Wed Mar 14, 2018 10:41 am

Doc wrote:
Wed Mar 14, 2018 9:00 am
triceratop wrote:
Wed Mar 14, 2018 12:13 am
dbr wrote:
Tue Mar 13, 2018 9:30 am
Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.
Precisely. The lowest-priced ETF in my portfolio is about $30 so that’s the most I ever have in money market. If I used mutual funds the amount would be $0.
Don't fees and spreads with using odd lot ETFs for cash management eat your lunch?
My cash management strategy is to hold very little cash. The Lowest-priced ETF in my portfolio I was referring to is in fact a very liquid equity ETF.

For spreads, I’m unconcerned. Usually I get someone else to pay the spread or I trade when the spread is 1-2bp. I don’t pay commissions.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by Doc » Wed Mar 14, 2018 11:17 am

In Rick's somewhat related thread "Is Cash Trash? The Purpose of Cash" viewtopic.php?f=10&t=243357#p3813506
the definition of cash was discussed.

Some said that any high quality fixed income with less than one year to maturity could be treated as cash.

With that in mind is Vanguard Ultra-Short-Term Bond Fund Investor Shares VUBFX with a duration of 1.00 years and a duration of 0.93 years cash?
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by dbr » Wed Mar 14, 2018 3:38 pm

Doc wrote:
Wed Mar 14, 2018 11:17 am
In Rick's somewhat related thread "Is Cash Trash? The Purpose of Cash" viewtopic.php?f=10&t=243357#p3813506
the definition of cash was discussed.

Some said that any high quality fixed income with less than one year to maturity could be treated as cash.

With that in mind is Vanguard Ultra-Short-Term Bond Fund Investor Shares VUBFX with a duration of 1.00 years and a duration of 0.93 years cash?
Yes, yes

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by dbr » Wed Mar 14, 2018 3:38 pm

Doc wrote:
Wed Mar 14, 2018 11:17 am
In Rick's somewhat related thread "Is Cash Trash? The Purpose of Cash" viewtopic.php?f=10&t=243357#p3813506
the definition of cash was discussed.

Some said that any high quality fixed income with less than one year to maturity could be treated as cash.

With that in mind is Vanguard Ultra-Short-Term Bond Fund Investor Shares VUBFX with a duration of 1.00 years and a duration of 0.93 years cash?
No, no.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by Doc » Wed Mar 14, 2018 4:28 pm

Re: Can Vanguard's ultrashort bond fund be considered cash like?
dbr wrote:
Wed Mar 14, 2018 3:38 pm
No, no.
dbr wrote:
Wed Mar 14, 2018 3:38 pm
Yes, yes
:D

Short enough but too risky????

I'm using it as "cash like" waiting to be invested about every three months.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by ThrustVectoring » Wed Mar 14, 2018 6:11 pm

saver007 wrote:
Tue Mar 13, 2018 10:44 pm
Interactive Brokers is the only us broker that I know that pay any decent interest on credit cash balance.. IB pay fed funds rate minus 50 basis point which is about .93 percentage now but should go up as fed raises. IB don't pay any interest for the first 10k and you don't get any interest at all if your total account equity is less than 100k. At least once you qualify for it, interest is accrued right away for any new funds from sale, dividends,etc. No need to sweep or take additional risk of money market funds.

That being said, I like the 1.5%ish interest pay out of the Vanguard prime market funds Which is projected to go up as fed raises and probably will beat most high yield savings accounts in a rising environment. It is not very beneficial to buy this fund from IB as commission is $15 per trade. So my question is Vanguard the only place to buy this fund commission free?
If you're at Interactive Brokers, you should take advantage of their attractive margin loan rates (2.92% last I checked) and have a cash balance that's very slightly negative. No more than one month's worth of free cash flow. So if you deposit $1000 earmarked for VTI @ 152, you immediately buy 7 of it at $152 each for $1064 and float the small amount of margin in lieu of holding cash in your account.

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Re: your cash is trash at brokers J.Zweig - WSJ

Post by triceratop » Wed Mar 14, 2018 6:25 pm

Doc wrote:
Wed Mar 14, 2018 9:00 am
triceratop wrote:
Wed Mar 14, 2018 12:13 am
dbr wrote:
Tue Mar 13, 2018 9:30 am
Why are people holding significant fractions of their portfolio in sweep accounts or in "higher yielding" alternatives at all? Presumably the reason is that people are not paying attention and just don't know. One place I will agree with Rick Ferri is that sweep accounts AND the recommended alternatives are not investing.
Precisely. The lowest-priced ETF in my portfolio is about $30 so that’s the most I ever have in money market. If I used mutual funds the amount would be $0.
Don't fees and spreads with using odd lot ETFs for cash management eat your lunch?
Another way to answer this statement is that my yearly contributions are not enough to use round lots. If my yearly contributions are in the range of $12,000 to $20,000 then I'd be hardpressed to keep my allocation reasonably close by using round lots. With current VTI prices that would require a $14k lump sum. So even if the fees and spreads (which there aren't really any of, as I mentioned above) were a problem, it would still be better to eat the fees and stick to your allocation.

Now if I were saving $100k/year then you would have a point that using round lots might make sense. But I don't see that happening for a decade or more.
livesoft wrote:Odd lot orders for ETFs actually execute at favorable prices compared to round lots in my experience.
Yes, in practice, placing limit buy orders at the bid and limit sell orders at the ask works quite well for the liquid ETFs that Bogleheads use. Your order gets picked off pretty quickly, even if you aren't guaranteed NBBO. VSS seems to be an exception; I always get an aneurysm buying new lots of VSS because it's more of a pain to ensure you're getting a good deal.
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by grabiner » Fri Mar 16, 2018 10:53 pm

triceratop wrote:
Wed Mar 14, 2018 6:25 pm
livesoft wrote:Odd lot orders for ETFs actually execute at favorable prices compared to round lots in my experience.
Yes, in practice, placing limit buy orders at the bid and limit sell orders at the ask works quite well for the liquid ETFs that Bogleheads use. Your order gets picked off pretty quickly, even if you aren't guaranteed NBBO. VSS seems to be an exception; I always get an aneurysm buying new lots of VSS because it's more of a pain to ensure you're getting a good deal.
I try to buy VSS in round lots for this reason. However, since I always buy with limit orders, I often wind up with odd lots because of partial fills. Checking my records, I have bought VSS 17 times, all 17 as attempts at round lots, but 4 purchases (all for 100 shares) got split across multiple prices. I have never had to sell across multiple prices, but I did once place an order to sell 300 shares and have it execute across five different purchases. (When I was down to the last 22 shares, I would have probably changed the order to make it marketable if someone hadn't taking it within a few minutes.)
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Re: your cash is trash at brokers J.Zweig - WSJ

Post by bberris » Tue Mar 20, 2018 10:09 am

I now realize that I am better off buying 1 month CDs at Ameritrade, than trading in BIL. Interest rate is higher, and the short term trading fee holds BIL to a 1 month term anyway.

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