Expense ratio of money market funds bigger than yield?

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vu8
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Expense ratio of money market funds bigger than yield?

Post by vu8 »

Hi there,

Just one of my questions that I am curious about, please have a look at VMFXX,
https://investor.vanguard.com/mutual-fu ... file/VMFXX

The expense ratio is 11 basis points, but the current yield is 1 basis point, so where does VMFXX deduct its expense ratio from? Do we lose money on this sweep fund by the expense ratio being deducted?
raixx017
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Re: Expense ratio of money market funds bigger than yield?

Post by raixx017 »

Per my understanding, what you see there is _after_ adjusting for the expense ratio.
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JoMoney
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Re: Expense ratio of money market funds bigger than yield?

Post by JoMoney »

The funds yield is stated after expenses.
There are other fund companies that have much higher cost money market funds, most of those have had to implement "temporary reductions"/fee-waivers to keep their money market fund/settlement accounts to have a stable non-negative return.

One example, is Fidelity's SPAXX Government Money Market Fund
https://fundresearch.fidelity.com/mutua ... =sq-NavBar

That fund's ER is 0.42% , the fund's 7 day yield is 0.01% * "7-Day Yield Without Reductions -0.35%"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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vu8
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Re: Expense ratio of money market funds bigger than yield?

Post by vu8 »

JoMoney wrote: Tue Jul 20, 2021 11:28 pm The funds yield is stated after expenses.
There are other fund companies that have much higher cost money market funds, most of those have had to implement "temporary reductions"/fee-waivers to keep their money market fund/settlement accounts to have a stable non-negative return.

One example, is Fidelity's SPAXX Government Money Market Fund
https://fundresearch.fidelity.com/mutua ... =sq-NavBar

That fund's ER is 0.42% , the fund's 7 day yield is 0.01% * "7-Day Yield Without Reductions -0.35%"
Fantastic info. Which means, at any time any day, these high expense ratio money market funds can just remove their expense ratio waivers, which means the investors who deposit money in these funds will basically lose money parking their money there? Has it happened before? Would it be one of the potential risks of parking money at these money market sweep funds, especially ones with high expense ratios?
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JoMoney
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Re: Expense ratio of money market funds bigger than yield?

Post by JoMoney »

vu8 wrote: Tue Jul 20, 2021 11:38 pm
JoMoney wrote: Tue Jul 20, 2021 11:28 pm The funds yield is stated after expenses.
There are other fund companies that have much higher cost money market funds, most of those have had to implement "temporary reductions"/fee-waivers to keep their money market fund/settlement accounts to have a stable non-negative return.

One example, is Fidelity's SPAXX Government Money Market Fund
https://fundresearch.fidelity.com/mutua ... =sq-NavBar

That fund's ER is 0.42% , the fund's 7 day yield is 0.01% * "7-Day Yield Without Reductions -0.35%"
Fantastic info. Which means, at any time any day, these high expense ratio money market funds can just remove their expense ratio waivers, which means the investors who deposit money in these funds will basically lose money parking their money there? Has it happened before? Would it be one of the potential risks of parking money at these money market sweep funds, especially ones with high expense ratios?
I don't think it would just happen, they would give warning first. Several months back people posted about another company that gave notice about the limited duration of their money markets expense ratio (I think it was at TIAA CREF, but not sure).
For the brokerages that use these as "Settlement" accounts, if they had a negative rate they couldn't work as a settlement account, they would have to use something else.
FWIW, for most accounts Fidelity also offers FDIC Bank Sweep as another option for settlement account. Usually the money market fund has a higher yield, but since last year that hasn't been the case.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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vu8
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Re: Expense ratio of money market funds bigger than yield?

Post by vu8 »

JoMoney wrote: Tue Jul 20, 2021 11:45 pm I don't think it would just happen, they would give warning first. Several months back people posted about another company that gave notice about the limited duration of their money markets expense ratio (I think it was at TIAA CREF, but not sure).
For the brokerages that use these as "Settlement" accounts, if they had a negative rate they couldn't work as a settlement account, they would have to use something else.
FWIW, for most accounts Fidelity also offers FDIC Bank Sweep as another option for settlement account. Usually the money market fund has a higher yield, but since last year that hasn't been the case.
Well said sir, the TIAA situation is indeed eye opening. viewtopic.php?t=315639
alex_686
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Re: Expense ratio of money market funds bigger than yield?

Post by alex_686 »

I doubt that a money market fund would ever have a negative yield. Money markets are a loss leader for most fund sponsors. A convince that the customer demands.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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jeffyscott
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Re: Expense ratio of money market funds bigger than yield?

Post by jeffyscott »

It's not a money market, but Fidelity does report an actual negative SEC yield on their ultrashort bond fund, Fidelity Conservative Income Bond Fund (FCONX) with SEC yield at -0.05% as of 6/30/21 and -0.04% as of 7/19/21.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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JoMoney
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Re: Expense ratio of money market funds bigger than yield?

Post by JoMoney »

alex_686 wrote: Wed Jul 21, 2021 12:28 am I doubt that a money market fund would ever have a negative yield. Money markets are a loss leader for most fund sponsors. A convince that the customer demands.
They might currently be a 'loss leader' with the near-zero rates on T-bills and commercial paper securities in these funds, but under "normal" times they do pretty well with profiting on cash balances in them.
I believe it helps capitalize the overall balance sheet of the brokerage as well, so even if they're not currently making money on the spread between the yields on securities and expenses of the fund, they are earning money on the interest loaned out to margin users.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
alex_686
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Re: Expense ratio of money market funds bigger than yield?

Post by alex_686 »

JoMoney wrote: Wed Jul 21, 2021 11:34 pm
alex_686 wrote: Wed Jul 21, 2021 12:28 am I doubt that a money market fund would ever have a negative yield. Money markets are a loss leader for most fund sponsors. A convince that the customer demands.
They might currently be a 'loss leader' with the near-zero rates on T-bills and commercial paper securities in these funds, but under "normal" times they do pretty well with profiting on cash balances in them.
I believe it helps capitalize the overall balance sheet of the brokerage as well, so even if they're not currently making money on the spread between the yields on securities and expenses of the fund, they are earning money on the interest loaned out to margin users.
JoMoney,

Your statement is kind of on mark if this were a bank. It is specifically off of the mark for a mutual fund.

Cash that comes into a money market mutual fund goes onto the fund's balance sheet, not the fund's sponsor. Today there are strong regulations in place that client's money won't fund the broker's balance sheet. In the past when brokers have gone bankruptcy they took their client's money with them.

I am not saying that money deposited into a money market account can't be used indirectly to fund margin loans. But it is discouraged. The portfolio manager must seek the highest return for their investors in the fund, not for their fund's sponsor or their clients. Brokers are discouraged from financing margin loans. That would require them to operate like banks.

The normal method is to use banks instead, which are set up to do these things. The standard method is hypothecation. The broker lends the client's stock to a bank as collateral, the bank sends money to the broker to fund the margin loan. Generally the broker makes the money on the security lending fees and the spread between the margin loan and bank loan.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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