Money Market Fund Focus

As part of our strategy in managing the cash holdings in our Clients’ portfolios, Yeske Buie employs a handful of Money Market Funds (MMFs), including:

• Schwab’s Value Advantage Money Fund (Investor Shares: SWVXX; Ultra Shares: SNAXX)
  • This fund is bought and sold like the other mutual funds in our Clients’ accounts (albeit without any transaction fees) and provides interest income.

• Schwab’s Government Money Fund (Sweep Shares: SWGXX)
  • This fund provides immediate liquidity and is protected by the measures we described here.

In this piece, we’ll focus on the Value Advantage Money Fund. The primary functions of this fund are to provide stability of capital, liquidity, and current income. Furthermore, as mandated by the SEC, the fund must ensure its underlying investments are evaluated on the basis of credit quality and diversification when determining if they are eligible to be included in the fund.

In response to way the Coronavirus pandemic has affected the economy and financial markets, an emergency rate cut was executed by the Federal Reserve in mid-March, bringing base interest rates to 0%. This affected the Value Advantage Fund directly, as its yield is correlated with the direction in which the federal funds rate moves. As such, its current 7-day yield is 0.63% (as compared to its trailing 12-month return of 1.87%).

Given the decrease in yields, it is important to note two things. First, there is historical precedent for Schwab to waive its advisory fees in Zero Interest-Rate Policy environments like the one we’re in if the expense ratio of the fund exceeds the yield (which is not currently the case – the expense ratio for the Value Advantage Money Fund is 0.34%). Second, no Schwab MMF has ever “broken the buck” (i.e. had its value fall below the value of $1).

In addition to the steps Schwab takes to preserve the value of its MMFs, we think it bears mentioning that the Fed has taken action to enhance liquidity in financial markets and limit the impact of the Coronavirus pandemic on MMFs, including the launch of three programs:

• The Money Market Mutual Fund Liquidity Facility (MMLF), which enhances the liquidity of money market funds by allowing them to sell securities to banks and broker-dealers, who can then pledge those securities as collateral when borrowing from the Federal Reserve Board.
• The Primary Dealer Credit Facility (PDCF), which allows institutions that purchase government debt directly from the government to borrow from the Federal Reserve Board.
• The Commercial Paper Funding Facility (CPFF), which enables the Federal Reserve Board to purchase corporate debt and create liquidity for companies.

For additional details about the information in this piece, see Schwab’s FAQs about its Money Funds.

And for more information specifically about Schwab’s Value Advantage Money Fund, click here.