Is Your Cash Working for You, Your Broker or Your Governor?

Is Your Cash Working for You, Your Broker or Your Governor?

May 18, 2023

John Wooden is widely considered to be the greatest coach in American sports history. He had a remarkable record, with 10 national championships, 16 Final Fours, an 88-game winning streak from 1971-73, and 8 undefeated perfect conference seasons. But his reach extended far beyond college basketball. His lessons and philosophy served as the basis for several books about achieving success in life and business.

So how did Coach Wooden begin the first practice of each new season? Maybe scheming up newer and more innovative set plays for his All-Americans?  Or something more fundamental like dribbling, passing, and shooting drills? Nope, try socks.  A bare-footed Wooden instructed his players on how to put on their socks and lace up their sneakers properly. The coach explained that “…sweat socks, put on correctly, reduce the chance of blisters, which, in turn, ensures that a player can rebound—or shoot free throws or play defense—free from pain or distraction.”[i]

Speaking of pain and distraction, the rolling bank crisis has many wealthy households re-evaluating their cash options.  According to Morningstar Direct, investors put over $430 billion in money market funds in the first quarter of 2023.  This is the second-largest quarterly inflow since 2007.[ii]

Yes, compared to demand deposits, money market funds offer compelling yields.  But not all money market funds are created equal.  Account minimums, expense ratios and taxability issues can create dramatically different outcomes depending on a household’s unique circumstances.  You may be leaving money on the table that a financial institution or your state tax collector will happily take out of your pocket. 

Previously, we noted our preference for government money market funds, largely due to the adverse experiences of prime funds during the Global Financial Crisis.  The table below outlines representative yield estimates for four types of cash and equivalents – a government money market fund for smaller balances (retail), a government money market fund for larger balances (institutional that typically require a $1 million initial purchase), an investment in T-Bills via an ETF and a one-year high quality fixed income mutual fund.[iii]

The information contained above is for illustrative purposes only. 

But let’s further view these options through the old adage of “it’s not what you earn but what you keep.” 

Let’s start with the obvious…fees.  The retail government money market fund sports an expense ratio of 0.42%, well above institutional shares and our other options.  Believe it or not, that is 2-3 times higher than the average fee of custom tax-managed equity or bond accounts.  When a short-term account is charging more than a diversified basket of custom managed long-horizon assets, something is amiss.  Your broker or financial institution is disproportionately siphoning your yield. 

How about taxes?  All of the options can’t escape Federal taxes.  But what about state taxes?[iv]

Here there is a nuance.  Treasury bills are only taxable at the Federal level and not the state level.  But many government money market funds invest in repurchase agreements, commonly known as a repos.  A repo involves selling a Treasury security to a money market fund with a promise to repurchase at a higher price within a few days.  Currently money market funds are getting more yield in overnight repo from the Fed than one can get in T-bills. 

The interest on repos is taxable at the state level.  Suppose our investor is a California resident in the highest tax bracket and the government money market funds are comprised of 67%-75% repos.  In the chart, you can see the California state taxes gobble up nearly a half percent of the yield.  

The information contained above is for illustrative purposes only. 

Seemingly lower yielding Treasury Bills and the ultra-short-term bond fund start to look considerably better.  They have lower fees (pay less to your broker) and lower state income taxes (less to your governor.)  Further, the ultra-short term bond funds typically produce higher long-term returns than money market funds and Treasury Bills.  This is expected…they have some price variability.  But, its rewarded as the ultra-short term bond fund in our sample outperformed the money market and Treasury Bill options by 0.3-0.4% per annum over the past fifteen years (ended April 30, 2023).  Unless our cash will absolutely be used in an overnight window, investors would be wise to evaluate such an option within their cash portfolio. 

Taking a cue from Coach Wooden’s attention to the most basic of details, investors would be wise to shop around and holistically think about their cash allocation.  Cash, like socks, can be boring.  But fee and tax blunders, like blisters, can be avoided with a little bit of preparation.  Of course, individual circumstances can change these conclusions.  Please let us know if you would like to explore. 

Markets fluctuate.  Priorities change.  We’re here to help.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

[i] See Wooden: A Lifetime of Observations and Reflections On and Off the Court by John Wooden, 1997, New York: McGraw–Hill, p. 63.


[iii] Figures are intended to be representative of fund categories as of May 17. 

[iv] Clients are advised to discuss the tax impact of investments with their tax advisor.