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You’re Giving Away Yield and Don’t Even Know It

It’s payback time.

Savers weren’t the only ones who suffered from low interest rates for most of the past decade-plus. Some asset managers suffered, too—but those days are gone.

The Federal Reserve slashed short-term interest rates in 2008—and kept them at next to nothing, except for a brief interlude, until early this year.

With interest rates so low, asset managers had little choice but to forgo collecting most of their fees on money-market mutual funds. Otherwise, investors would often have earned a negative return after the managers took their cut.

Between 2009 and 2021, asset-management firms waived more than $53 billion in these fees, according to the Investment Company Institute.

They’re quickly recouping those forgone fees. That’s crimping investors’ returns.

At the end of 2021, not a single US money-market fund was charging more than 0.18% in annual expenses, according to Crane Data, a firm in Westborough, Mass., that monitors money-market funds and other cash investments.

Ace of Sept. 30, 210 money funds—fully one-fourth of the total—were charging at least 0.5% in annual expenses, according to Crane. Nearly two dozen weighed in at 1% or more.

That helps explain why, with one-month Treasury bills and commercial paper yielding about 3.2% this week, the average money fund yielded just under 2.8%.

That’s way better than the pathetic 0.02% that money funds were yielding as of Dec. 31. But it isn’t good enough.

Let’s put these costs in perspective by comparing money funds to other types.

Back in the 1990s, total fees at stock mutual funds averaged roughly 1%.

Since then, fees at stock funds have fallen sharply under fierce competitive pressure from Vanguard Group, the index-fund giant, and from cheap exchange-traded funds.

Weighted by size, the average stock mutual fund charged 0.47% in annual expenses in 2021, according to the Investment Company Institute. Stock ETFs were even cheaper, at an average of 0.16%.

What happened to money-market fees over the same period? In 2008, taxable money funds charged an average of 0.48% in annual expenses, with the 100 largest charging 0.37%, according to Crane. Ace of Sept. 30 this year, the average expense was 0.39% among all taxable money-market funds and 0.26% among the 100 largest.

Instead of falling by more than half, like the fees on stock funds, the expenses on money funds have declined by less than one-third—thanks to their steep rise this year.

Even though their portfolios tend to look alike, money funds still do pick each investment by hand rather than passively replicating an entire market, as stock and bond index funds do. That has kept their costs relatively steep.

Money funds with higher fees are likely to have lower net returns; every penny the manager takes out is one penny less for you. Those with annual expenses of at least 0.5% yield an average of 2.18%, versus 2.76% for the 100 largest money funds.

All else equal, higher-cost funds must have lower yields—unless the managers take extra risk to try to overcome the drag of bigger fees.

On average, the funds with expenses higher than 0.5% own securities with maturities 10% longer—18 days versus 16 days for all money-market funds.

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That makes those with the highest fees ever-so-slightly riskier. To be sure, because all money funds hold short-term, high-quality debt, it isn’t likely that any will fall below their standard value of $1 per share.

But one, the Reserve Primary Fund, did “break the buck” in 2008, dropping to 97 cents per share—a 3% decline in assets that investors expected to remain 100% safe. Why take even the remote chance of a repeat when you want your cash to be perfectly secure? Steering clear of money funds with high expenses should lower not only your costs, but your risk.

The recent rise in fees raises a larger question: Are money-market funds worth owning anymore?

They still hold $4.58 trillion. That’s partly because money-market mutual funds are convenient. You get free checkwriting, transfers to and from your bank, exchanges in and out of other mutual funds, and withdrawals at any time without penalty.

However, financial advisers may charge their own annual management fees on cash you keep in a money fund—which they typically don’t on your holdings of Treasury bills or certificates of deposit at your bank. That fee stream gives them an incentive to recommend, or leave in place, a money fund even if it might not be the best option for you.

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What have you done to increase the yield on your cash? Join the conversation below.

Brokerage firms may pinch even more of your pennies. So-called sweep options, where a brokerage automatically routes any cash you earn from dividends, interest or sales, generally yield under 0.5%.

Banks, brokers and fund companies are counting on you to leave your money where it is, enabling money funds to remain one of the last bastions of high fees.

You might have to keep some cash in money funds for the sake of convenience. But you can lift your return on cash above 3% by buying Treasury bills directly, investing in CDs from online banks or using a rate-shopping service like MaxMyInterest.com.

Investments are finally producing income again. You can, and should, be getting your fair share.

Write to Jason Zweig at [email protected]

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