Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

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afan
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by afan »

neurosphere wrote: Sun Mar 26, 2023 1:40 pm


While I agree with all of this (and this comment is not direct to Nisi but is a general comment) it would seem irrational for anyone with substantial retirement assets in ETFs or mutual funds of any kind to worry about whether FDIC protection is safer than a Treasury mutual fund.

As for the amount covered by the FDIC, I agree. Any amount above the insurance limit could be quite risky. No one knows what will happen to uninsured amounts at the next bank failure. And there is no increased return to compensate for that risk. The etfs and mutual funds, presumably, offer potentially higher returns than an FDIC-insured bank account.
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Eno Deb
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by Eno Deb »

texas lawdog wrote: Sun Mar 26, 2023 10:16 amIsn't a redemption gate feature designed to prevent these type of runs on mutual funds in the future?
That was the intention, but ironically concerns about redemption fees and gates were what caused the large outflows from prime MMFs when the pandemic first hit (customers and institutional investors wanted to get their money out before restrictions were imposed). There is some controversy whether this constituted a "run", but it was serious enough that the Fed stepped in and backstopped prime MMFs.
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neurosphere
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by neurosphere »

afan wrote: Sun Mar 26, 2023 1:58 pm
neurosphere wrote: Sun Mar 26, 2023 1:40 pm


While I agree with all of this (and this comment is not direct to Nisi but is a general comment) it would seem irrational for anyone with substantial retirement assets in ETFs or mutual funds of any kind to worry about whether FDIC protection is safer than a Treasury mutual fund.

As for the amount covered by the FDIC, I agree. Any amount above the insurance limit could be quite risky.
Completely agree with the bolded. I was limiting my comment to $250k in FDIC vs Treasury MMF and those who prefer the FDIC protection yet have retirement assets in mutual funds. In fact, Wealthfront replied to a tweet of mine on this topic essentially stating that their FDIC accounts were safer than an all-Treasury MMF but didn't answer under what circumstances that MMF monies would be at risk. :D
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by tibbitts »

I don't remember all these posts about security of bank and MM funds at any time in the past; does anybody else? Here or on Diehards (Morningstar)? I agree that times are generally miserable now but are they really that much worse in a financial sense than during the GFC for example?
Eno Deb
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by Eno Deb »

afan wrote: Sun Mar 26, 2023 11:04 amThe value of the securities is also exposed to interest rate risk. If there is a spike in rates, then the value of the shares can go down. As others have noted, the SIPC does not provide any protection against this
This is true, but a very theoretical risk: treasury MMFs hold treasuries with ultra-short durations, whose rate is determined mostly by the Fed fund rate, which the Fed obviously controls. It is highly unlikely that the Fed would allow the rate to suddenly spike in a crisis situation.

Personally I'm less concerned about the (very small) interest rate risk of ultra-shorts than about potentially not being able to access my funds. Maybe ultra-short treasury ETFs like BIL, SGOV, SHV etc. are the best alternative after all. They obviously don't have a fixed NAV, but that also means they are not at risk of coming under stress because they have to try and stay at $1 at all times. For similar reasons institutional MMFs are required to have a floating NAV after all ...
Eno Deb
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by Eno Deb »

tibbitts wrote: Sun Mar 26, 2023 2:16 pm I don't remember all these posts about security of bank and MM funds at any time in the past; does anybody else? Here or on Diehards (Morningstar)? I agree that times are generally miserable now but are they really that much worse in a financial sense than during the GFC for example?
I'm not sure about this forum, but in general there was a lot of discussion about this during the GFC. That was, after all, the reason why the FDIC limit was increased from $100k to $250k in 2008.
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anon_investor
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by anon_investor »

afan wrote: Sun Mar 26, 2023 1:44 pm
anon_investor wrote: Sun Mar 26, 2023 1:38 pm
afan wrote: Sun Mar 26, 2023 1:33 pm
anon_investor wrote: Sun Mar 26, 2023 1:08 pm
Note that FDLXX is a treasury only money market fund and invests exclusively in treasuries, no repos.
According to Fidelity
In addition, the Adviser normally invests at least 80% of the fund's assets in U.S. Treasury securities.

And
The Adviser normally invests at least 99.5% of the fund's total assets in cash and U.S. Treasury securities. Potentially entering into reverse repurchase agreements.
So it does not invest exclusively in Treasurys. But the share of Treasurys is higher than in some other Treasury money market funds. At least the short note from Fidelity does not specify what "cash" means.
It has been 100% US treasury debt for quite some time. I am sure that carve out is to avoid breaking the buck in a worst case scenerio, by allowing the purchase of repos (e.g. from the NY Fed Reserve, much like VUSXX is doing right now). This is unlike a "Treasury" money market fund like FZFXX which is over 85% repos.
FDLXX is at 94% Treasurys according to Fidelity.

https://fundresearch.fidelity.com/mutua ... /31617H300
That makes sense, they must have some cash to satisfy daily redemptions. The point is it invests in treasuries and not repos.
tibbitts
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by tibbitts »

Eno Deb wrote: Sun Mar 26, 2023 2:33 pm
tibbitts wrote: Sun Mar 26, 2023 2:16 pm I don't remember all these posts about security of bank and MM funds at any time in the past; does anybody else? Here or on Diehards (Morningstar)? I agree that times are generally miserable now but are they really that much worse in a financial sense than during the GFC for example?
I'm not sure about this forum, but in general there was a lot of discussion about this during the GFC. That was, after all, the reason why the FDIC limit was increased from $100k to $250k in 2008.
Maybe I just don't remember the posts about bank or MM fund security because there were many more posts about "<= 50% equities" and "Plan B" due to greater equity market losses at the time.
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Metsfan91
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by Metsfan91 »

nisiprius wrote: Sun Mar 26, 2023 1:04 pm Ultimate safety is unknowable because we are talking about "black swan" events that rarely recur, and never twice in the same way, so there are no reliable past statistics. For example, the Reserve Primary Money Market mutual fund collapsed in 2008, and it took about two-and-a-half years before shareholders got virtually-but-not-quite-all of their money back. But that's why they made fresh regulations, involving the distinction between "retail" and "institutional" funds, and the ability to impose liquidity fees and redemption gates to stop runs. So money market funds are safer than the used to be, and if another money market fund does collapse, it won't be in the same way or for the same reasons.

When you are talking about FDIC-insured bank deposits, you are not talking about the safety of banks, you are talking about the safety of the FDIC. The FDIC is backed by the full faith and credit of the United States Government.

I think any FDIC-insured bank account is saf-ER than a money market fund, for these reasons:

1) Banks fail all the time, over 500 since 2009. The FDIC has a routine for rescuing depositors and they do it often enough to maintain proficiency. I have not heard of it causing more than a small inconvenience to depositors. FDIC insurance has worked and worked smoothly hundred of times for years and years. We don't just know FDIC insurance is there, we know it has worked.

2) Brokerage accounts are subject to three specific kinds of very rare risk:

a) The mutual fund shares might not be there. Protection: SIPC.

b) The mutual fund share might be there, but the stuff that's supposed to be inside them might not. Protection: 1940-act regulations that require the assets to be held by an independent custodian... but no government guarantees.

c) The mutual fund shares might be there, and 100% of the stuff that supposed to be inside them might be there, but they might not be worth $1/share. Protection: none, you're fully exposed to that risk.

More details. a) Brokerages are supposed be holding 100% of your assets all the time. If they aren't, they're breaking rules and maybe committing a crime. But SIPC is not formally "insurance;" unlike FDIC it's not backed by the full faith and credit of the US government. And unlike FDIC, it doesn't get tested often enough to know how well it works.

b) The 1940 act sets up rules and mechanism to make mutual funds and ETFs safe, but there is no "government insurance" component.

c) There's no protection at all against the contents of a money market fund being worth less than $1/share. That's what brought Reserve Primary down. Again, the SIPC does not protect against that. That's why it was miserable for fund shareholders. The problem was commercial paper. Retail money market funds that invest exclusively in government issues and no commercial paper don't have the same risk. Do they have any risk? I dunno.

Before Reserve Primary, the standard language you saw in discussions was "money market funds are generally regarded as safe, but they are not as safe as an FDIC-insured bank account." The collapse of Reserve Primary convinces me that that statement is true.

The additional safety might not be enough to matter in making choices.
Appreciate the detailed information.

Thanks to everyone else who chimed in on my question
Who is providing insurance for option B?
Definitely learned a lot.
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beyou
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by beyou »

afan wrote: Sun Mar 26, 2023 11:04 am Note that Treasury money market funds for the most part do not invest directly in Treasurys. Much of the money is in repurchase agreements collateralized by Treasurys. In principle, the collateral should support the value if the seller defaults on the agreement. But holding this is different than directly owning the Treasury security. The US does not guarantee the value of the repurchase agreement.

The value of the securities is also exposed to interest rate risk. If there is a spike in rates, then the value of the shares can go down. As others have noted, the SIPC does not provide any protection against this.

For these reasons, an FDIC-insured bank account is safer than a money market fund, even a Treasury money market fund. The risk of a Treasury fund is low but not zero.

If your FDIC-insured bank goes under, it usually gets taken over during the weekend and by Monday morning things should be normal.

If you have more than the insured amounts, then it is unclear whether the government will guarantee the excess. Right now the answer appears to be "maybe." With it depending on the assessment by the Treasury Secretary at the time.

Many people cheerfully accept the low risk in a federal or Treasury money market fund in return for a higher yield than available from an FDIC-insured bank account.
There is interest rate risk in a bank account.
If rates fall, your US Treasury may rise in value, your checking account will not.
So you have a relative loss of value compared to if you had bought US Tsy securities.

And saying the US does not guarantee repos is simply nonsense.
A fund lends out it's cash and received a US Tsy in return.
Should they not get back the cash, they sell the US Tsy and receive cash.
Repos are no different than owning US Tsy securities from the standpoint of credit risk.
Either way you hold a US Tsy, with the mere technicality of who legally owns the US Tsy.
A mutual fund physically takes possession of the US Tsy security collateral, and has legal right to keep it if
the repo counterparty does not fullfil their obligation and return cash invested by the mmkt fund.

I worked in the industry, both for a major bank and multiple fund managers.
I wouldn't hesitate to put any amount of money in a Vanguard or Fidelity gov/federal mmkt fund, repos or not.

I think it prudent to keep some cash in multiple checking accounts to pay bills for the next few weeks/months.
There are many ways one can temporarily lose access to a bank or brokerage of fund account.
Besides defaults, your internet access can be frozen, their systems can be down, there can be fraudulent transactions
(though this far more likely at a bank than a brokerage without cash management features like Vanguard).
But as far as the bank failure scenario that so many worry about now, your money is just as safe and liquid in a good mmkt fund, no caveat.
capran
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by capran »

I don't know the finer details or Fidelities MM fund you're referring to, but if it is anything similar to Vanguards VMRXX, my understanding is that it has not gone below the $1. per share since inception, which was in 1989. But I certainly share your anxiety with all the press. But I know my credit union(.45% if over 100k) lags far beyond the Money market (4.67 SEC 7 day yield), and given that discrepancy, I guess I'll assume the risk.
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WallyBird
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by WallyBird »

I had an account at Washington Mutual for a number of years right up to the day they were shut down by FDIC one weekend in 2008. My balance was well within FDIC limits.

I don't recall even a website burp. They were online as usual the following Monday. I never worried, and haven't worried since about FDIC or NCUA insured accounts.

I did close an account around that time at a small CU that only had private insurance. I won't bother with any bank or CU that's not federally insured.
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Ed 2
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Re: Which is safer? $250k cash at small online bank or $250k in MM fund at Fidelity?

Post by Ed 2 »

runner540 wrote: Sun Mar 26, 2023 10:44 am
Ed 2 wrote: Sun Mar 26, 2023 4:17 am You already lost by keeping so muck cash in neither of this accounts.
Depends on how long it’s been there. Cash performed way better than stocks or bonds in 2022.
If you buy equity for one year , I have no comment’s.
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