A comparison of different cash equivalent funds (for your portfolio)
Legend:
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A ‘do not pet that dog 🐻’ notification means you should stay the hell away or completely distrust whatever that product/security/site/external piece of advice is. It could also mean: “Don’t be dumb” To understand where the ‘do not pet that dog’ reference comes from watch this video here: link
The reasoning behind this post is as follows: SPAXX is a money market fund (one that I prefer because of my familiarity with it). It’s a place where my money can sit and be fully liquid while getting a decent rate of interest relative to a bank for pretty low risk (it’s treasury and overnight repo only). I can write checks against the balance or pay bills electronically. There are no fees around any of this (unlike a bank).
But there are other funds out there that might serve purposes in other ways. For instance, let’s say that you have a certain 401(k) servicer who sucks (*ahem Empower cough cough*) but you have to stay with them since your company has signed a contract with them to service their 401(k)s.
In Empower’s case they charge fees on certain types of trades as of this writing (assuming you’ve elected to have a self-directed brokerage account).
By default, your core position where money sits while waiting for purchases is the Dreyfus insured deposits fund. Unlike some servicers (like Fidelity), you cannot change your core position with Empower. This means that if you don’t want to immediately invest the money and you still want to get some interest and have it be relatively liquid, you will have to invest it in something else besides your core position. In between this and the outrageous fees Empower charges on seemingly randomly selected transactions, it makes dealing with them a pain in the a**.
Empower charges fees if you try to buy SPAXX (not sure why but they do). The only thing I can think of is SPAXX is a money market fund, and the other funds mentioned below are ETFs. Weird side note: If you had the misfortune to buy SPAXX and got hit with a commission, they don’t charge for interest from SPAXX to be reinvested in SPAXX ¯\_(ツ)_/¯ again, no idea why that is.
Empower does not charge a commission on other similar funds like SGOV, BIL, or USFR (as of this writing anyways). So one thing you can do, is buy one of these alternatives to SPAXX, have your money sit there, be pretty liquid, have relatively low risk, and collect the interest while you analyze how or where to invest your money for a longer term time frame.
What follows is a comparison/contrast of SPAXX, SGOV, BIL, and USFR (if you’re in a hurry, scroll down to the section called “Conclusion” near the bottom of this post):
SPAXX
SPAXX is Fidelity’s Government Money Market Fund
✙ Safety: The fund is NOT FDIC insured (none of the funds that follow are either). However, although you could lose money, the risks that you would are very very low. The reason why is because the fund is invested in treasuries, agency bonds, and overnight repo agreements linked to the US government.
Fund composition: More on that above point. Here is the specific breakdown of where your money goes as of this writing (there’s nothing weird in there like say, a mortgage backed security):
Performance: Fund performance is as follows (keep in mind that for our purposes we are looking for: low risk, high liquidity, decent interest rates, cash equivalency, US government only type funds that would outperform your bank’s checking account interest rate (which is around 0.01% or so atm in general. We also need this fund within a 401(k) structure, which rules out your bank anyways.
The performance is pretty decent, even at the longer end of the duration (10 years), the fund still crushes nearly all regular bank accounts without really taking on much risk aside from the lack of FDIC insurance.
Fund Expenses: The expense ratio is 0.42% as of this writing. Since the fund’s 7 day yield is currently +4.99%, your pretax return would be 4.57% APY. Since the fund is invested solely in US government instruments, the only taxes you would be paying on the interest would be federal income taxes. No state or local taxes. This is not relevant in a 401(k), but it is relevant if you have a taxable account you are using for check writing purposes.
SGOV
SGOV is iShares 0-3 Month Treasury Bond ETF. I’m typically opposed to bond funds for a variety of reasons, but since duration risk is short here due to the fact these are t bills, it’s probably okay.
✙ Safety: The fund is NOT FDIC insured. However, although you could lose money, the risks that you would are very very low. The reason why is because as the prospectus says: “The Fund will invest at least 80% of its assets in the component securities of the Underlying Index, and the Fund will invest at least 90% of its assets in U.S. Treasury securities that BFA believes will help the Fund track the Underlying Index. The Fund will invest no more than 10% of its assets in futures, options and swaps contracts that BFA believes will help the Fund track the Underlying Index.” The risk here is if the US government dissolves (in which case we’re all in trouble).
Fund composition: More on that above point. Here is the specific breakdown of where your money goes as of this writing (there’s nothing weird in there like say, a mortgage backed security):
Performance: Fund performance is as follows (keep in mind that for our purposes we are looking for: low risk, high liquidity, decent interest rates, cash equivalency, US government only type funds that would outperform your bank’s checking account interest rate (which is around 0.01% or so in general. We also need this fund within a 401(k) structure, which rules out your bank anyways.
The performance is pretty decent, the fund still crushes nearly all regular bank accounts without really taking on much risk aside from the lack of FDIC insurance.
Fund Expenses: The expense ratio is 0.13% as of this writing. Since the fund’s yield is currently +4.88%, your pretax return would be 4.75% APY. Since the fund is invested solely in US government instruments, the only taxes you would be paying on the interest would be federal income taxes.
BIL
BIL is State Street’s short term US treasury ETF
✙ Safety: The fund is NOT FDIC insured. However, although you could lose money, the risks that you would are very very low. The reason why is because the fund is invested in treasuries and treasury-like securities.
Fund composition: More on that above point. “ The fund invests substantially all, but at least 80%, of its total assets in the securities comprising the index and in securities that the Adviser determines have economic characteristics that are substantially identical to the economic characteristics of the securities that comprise the index. The index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.”:
Performance: Fund performance is as follows (keep in mind that for our purposes we are looking for: low risk, high liquidity, decent interest rates, cash equivalency, US government only type funds that would outperform your bank’s checking account interest rate (which is around 0.01% or so in general. We also need this fund within a 401(k) structure, which rules out your bank anyways.
The performance is pretty decent, even at the longer end of the duration (10 years), the fund still crushes nearly all regular bank accounts without really taking on much risk aside from the lack of FDIC insurance.
Fund Expenses: The expense ratio is 0.14% as of this writing. Since the fund’s yield is currently +4.71%, your pretax return would be 4.57% APY. Since the fund is invested solely in US government instruments, the only taxes you would be paying on the interest would be federal income taxes.
USFR
✙ Safety: The fund is NOT FDIC insured. However, although you could lose money, the risks that you would are very very low. The reason why is because the fund is invested in treasuries. “The fund invests at least 80% of its total assets (exclusive of collateral held from securities lending) in the component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The index is designed to measure the performance of floating rate public obligations of the U.S. Treasury. The fund is non-diversified.”
Fund composition: More on that above point. Here is the specific breakdown of where your money goes as of this writing (there’s nothing weird in there like say, a mortgage backed security):
Performance: Fund performance is as follows (keep in mind that for our purposes we are looking for: low risk, high liquidity, decent interest rates, cash equivalency, US government only type funds that would outperform your bank’s checking account interest rate (which is around 0.01% or so atm in general. We also need this fund within a 401(k) structure, which rules out your bank anyways.
The performance is really good compared to the other funds, even considering the expense ratio (more on that below). The fund still crushes nearly all regular bank accounts without really taking on much risk aside from the lack of FDIC insurance.
Fund Expenses: The expense ratio is 0.15% as of this writing. Since the fund’s yield is currently +5.14%, your pretax return would be 4.99% APY. Since the fund is invested solely in US government instruments, the only taxes you would be paying on the interest would be federal income taxes.
Conclusion
So, just a brief recap on the 1 year return after expenses, but before taxes:
SPAXX: 4.57%
SGOV: 4.75%
BIL: 4.57%
USFR: 4.99%
Despite having a slightly higher expense ratio, USFR is the winner in terms of yield. You can compare these four anytime here.