VUSXX vs. TreasuryDirect

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pcflow
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VUSXX vs. TreasuryDirect

Post by pcflow » Fri Dec 29, 2017 4:11 pm

Hi,

I'm new to the forum but have appreciated reading and learning from searching the posts. :sharebeer

I have a theoretical question I couldn't find a clear answer to:

Windfall-parking theory says to temporarily park large amounts (that would exceed FDIC limits) in short term (say 4-wk) T-Bills or an MM fund, until you figure out what you actually want to do with the cash. If you're particularly risk averse, you could:

1. Use VUSXX (Treasury Money Market Fund), whose holdings are 100% US T-Bills. Easiest to implement.
2. Use TreasuryDirect, to own short term T-Bills directly. Safest option. A little less convenient to implement, but not that much.
3. Use CDARS. (I don't like this as much for various reasons, so for discussion's sake let's leave this one out.)
4. Open a bunch of extra FDIC bank accounts to their limits. (Again for discussion's sake let's leave this one out. It's too clunky.)

I'm confused by the risk difference, if any, between option #1 and 2? If I'm not mistaken, the only way to lose the position in option #2 is if the so-called 'zombie apocalypse, Mad Max scenario, US collapses' happens. I'm willing to accept that particular risk, of course.

But when VUSXX has fine-print language like "you could lose money in this fund, the buck could break, blah blah", what other technically possible (even if highly improbable) edge cases are they talking about, that wouldn't affect direct owners of T-Bills?

Someone in an older post explicitly said, "VUSXX and owning T-Bills are not the same thing," but no other details were given. Can anyone shed some detailed light on this subject? Thanks.

lack_ey
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Re: VUSXX vs. TreasuryDirect

Post by lack_ey » Fri Dec 29, 2017 4:33 pm

Owning a fund that owns XYZ is not exactly the same thing as owning XYZ yourself, but out of context I don't know how to interpret what is meant. I mean, with a fund you're paying fund expenses. Legally it's not identical. But in terms of investment returns, investment risk, you're pretty much looking at the same thing (minus expenses).

The language about potentially losing money in money market funds, especially when applied to Treasury money market funds, is more a legal thing than a plain-talk-this-is-what-the-fund-does explanation. If there's a default on T-bills with investors getting a haircut, sure, the fund may have to break the buck then.

You could also just purchase T-bills in a brokerage account, and not bother with TreasuryDirect.

Though really, at this point I've kind of lost interest in edge case hypotheticals involving T-bills, and wouldn't bother looking beyond government-class money market funds under the new rules. That would include Vanguard's default settlement fund these days, Vanguard Federal Money Market Fund (VMFXX), which is in theory riskier than the Treasury money market fund.

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KlingKlang
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Re: VUSXX vs. TreasuryDirect

Post by KlingKlang » Fri Dec 29, 2017 4:51 pm

pcflow wrote:
Fri Dec 29, 2017 4:11 pm
"VUSXX and owning T-Bills are not the same thing," but no other details were given.
I'm not sure about how detailed this is but the biggest difference between VUSXX and T-Bills in Treasury Direct is that you can request a withdrawal from VUSXX at anytime but with Treasury Direct you have to wait until the bills come due. You can also deposit into VUSXX at anytime but have to wait for the bill's issue date at Treasury Direct. VUSXX is infinitesimally more risky but it's basically the difference between collecting after a limited vs full-scale thermonuclear war.

Searching "Treasury Direct" on this site will return many hits relating the (dis)pleasures of dealing with them. They make it more difficult than it should be to set up your account and to switch your connected bank account. They also do not mail 1099s, you have to download their clunky versions from their site when they get around to issuing them.

You can also open a brokerage account at Vanguard (or elsewhere) and purchase your T-Bills there. You can then sell them before their due date if you need to, although then you may incur a gain or loss.

Vienna
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Re: VUSXX vs. TreasuryDirect

Post by Vienna » Sat Jan 13, 2018 4:52 am

My knowledge of this is a bit superficial, but I think that in theory a money market fund holding 100% U.S. Treasuries could be subject to a run (I don't think this occurred during the run on money market mutual funds during the 2008 financial crises which I think was confined to prime money market funds which held corporate debt).

Because a U.S. Treasury money market fund would likely hold securities of varying maturities, in a run it might have to sell its positions at a discount in the open market. I think this might start to get one difference between directly holding a U.S. treasury obligation and in holding a position in a Treasury money market fund.

Perhaps someone could elaborate on this.

grok87
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Re: VUSXX vs. TreasuryDirect

Post by grok87 » Sat Jan 13, 2018 8:05 pm

you can get some info on VUSXX's risk from vanguard website

https://personal.vanguard.com/us/funds/ ... true#tab=2

the average maturity of the tbills it holds is 55 days

https://personal.vanguard.com/us/funds/ ... true#tab=0

the fund is a money market fund so maintains a stable NAV of 1.00. but the market value is a bit higher at 1.0003. that means if everyone demanded all their money back tomorrow then fund could pay everyone out at the full 1.00 NAV and still have some money left over.

let's say the market value was below 1 and everyone wanted their money back. i think the downside then is something like the fund would go into liquidation mode and you would have to wait around 55 days and then you would get your money back in full.
Keep calm and Boglehead on. KCBO.

FinancialDave
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Re: VUSXX vs. TreasuryDirect

Post by FinancialDave » Sat Jan 13, 2018 8:18 pm

I am confused why you need VUSXX with a 7-day yield of 1.19% when the standard money market VMMXX is paying 1.42%

Dave
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Kevin M
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Re: VUSXX vs. TreasuryDirect

Post by Kevin M » Sat Jan 13, 2018 8:24 pm

The conversation might be more productive if we knew why you are asking, and how much money you're talking about. One reason I mention this, is that the FDIC limit can be quite a bit higher than many people realize. For example, with a trust or POD account with five beneficiaries, you get coverage up to $1.25M.

As others have mentioned, if I went with Treasuries, I'd probably buy through a broker that charges no commission on Treasuries bought at auction.

Another thing I'll mention is that you have to be almost absurdly risk averse to avoid non-Treasury money market funds in the current economic environment. For example, a muni MM fund could earn you a much higher taxable-equivalent yield with virtually no chance of default in the short term.

Kevin
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radiowave
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Re: VUSXX vs. TreasuryDirect

Post by radiowave » Sat Jan 13, 2018 8:32 pm

Windfall-parking theory says to temporarily park large amounts (that would exceed FDIC limits) in short term (say 4-wk) T-Bills or an MM fund, until you figure out what you actually want to do with the cash.
pcflow welcome to the forum. You can go up to $250k per person per bank for FDIC coverage. There's probably a practical limit to spreading out the cash for FDIC purposes, but if it's under a million, worth considering.
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FinancialDave
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Re: VUSXX vs. TreasuryDirect

Post by FinancialDave » Sat Jan 13, 2018 8:36 pm

Kevin,
Which tax-exempt MM were you thinking?

When I look at the Vanguard VMSXX its 7-day yield is only .74%. Hardly seems an alternative to VMMXX paying 1.42%.

Dave
I love simulated data. It turns the impossible into the possible!

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Kevin M
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Re: VUSXX vs. TreasuryDirect

Post by Kevin M » Sat Jan 13, 2018 8:50 pm

radiowave wrote:
Sat Jan 13, 2018 8:32 pm
Windfall-parking theory says to temporarily park large amounts (that would exceed FDIC limits) in short term (say 4-wk) T-Bills or an MM fund, until you figure out what you actually want to do with the cash.
pcflow welcome to the forum. You can go up to $250k per person per bank for FDIC coverage. There's probably a practical limit to spreading out the cash for FDIC purposes, but if it's under a million, worth considering.
It's not really that simple. As I mentioned, with a trust or POD account with five beneficiaries, you are covered up to $1.25M at a single bank. You also can use different ownership categories to get more coverage.

Kevin
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Kevin M
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Re: VUSXX vs. TreasuryDirect

Post by Kevin M » Sat Jan 13, 2018 8:55 pm

FinancialDave wrote:
Sat Jan 13, 2018 8:36 pm
Kevin,
Which tax-exempt MM were you thinking?

When I look at the Vanguard VMSXX its 7-day yield is only .74%. Hardly seems an alternative to VMMXX paying 1.42%.

Dave
You're quoting the 1-year return. The SEC yield is 1.22%. For me, this is a TEY of 1.73%. I estimate my 2018 federal marginal tax rate at 27% (12% plus QD/LTCG going from 0% to 15%) and my state marginal tax rate at 8%.

Kevin
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