Keeping some cash on hand as “dry powder” can be a useful strategy for beginner and advanced investors alike.
Cash can serve as a psychological aid to stay invested during periods of market volatility, enable dollar-cost averaging or provide the opportunity to take advantage of a downturn to buy the dip.
Choosing the right vehicle for this cash is crucial, however. Straight cash in your brokerage account is liquid but doesn’t grow unless it’s in a sweep account.
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Certificates of deposit (CDs) promise safety due to their insured nature but aren’t liquid, as they’re locked up for a chosen period.
A high-yield savings account is liquid and safe but requires an extra step to transfer amounts to a brokerage, which can result in delays and unexpected fees.
To keep idle cash earning competitive interest within a brokerage account, Charles Schwab Corp. (ticker: SCHW) offers multiple money market funds, which are easily accessible thanks to no transaction fees, no sales loads and no minimum required investments.
These unique mutual funds achieve a stable net asset value (NAV) per share of $1 and high liquidity thanks to their underlying holdings, which typically include short-term government securities like Treasurys, high-quality commercial paper and repurchase agreements.
For a 0.34% expense ratio, these funds promise both safety of principal and competitive monthly income potential. For high-net-worth investors, a $1 million minimum investment threshold qualifies you for the “ultra” shares, which have even lower fees.
“If you have cash that you may need to access soon, a high-yielding money market fund is a good place to park it safely,” says Jim Penna, senior manager of retirement services at VectorVest.
Here are five of the best Schwab money market funds to buy now:
| Money market fund | Expense ratio | 7-day SEC yield as of June 11 |
| Schwab Value Advantage Money Fund (SWVXX) | 0.34% | 5.2% |
| Schwab Government Money Fund (SNVXX) | 0.34% | 5.0% |
| Schwab Treasury Obligations Money Fund (SNOXX) | 0.34% | 5.0% |
| Schwab U.S. Treasury Money Fund (SNSXX) | 0.34% | 5.0% |
| Schwab AMT Tax-Free Money Fund – Investor Shares (SWWXX) | 0.34% | 2.7% |
Schwab Value Advantage Money Fund (SWVXX)
“One of the Schwab money market funds I like is SWVXX,” Penna says. “It invests in short-term securities issued by the U.S. government, corporations and financial institutions, and currently has a seven-day SEC yield of 5.2%.” This yield metric is calculated based on the average income paid out over the preceding seven days, assuming no reinvestment of distributions and net of fee waivers.
SWVXX qualifies as a “prime” money market fund. This is considered the broadest type of money market fund available. Instead of being restricted to government Treasury and repurchase agreements, SWVXX can also hold corporate-issued securities like commercial paper and time deposits, largely issued by domestic financial institutions like banks. This fund charges a 0.34% expense ratio.
Schwab Government Money Fund (SNVXX)
“Ask whether you’re seeking to maximize yield from your money market fund and therefore are comfortable with it investing in more exotic short-term, asset-backed securities and commercial paper, or want to focus on a ‘risk off’ style safety with a concentration on U.S. government-backed securities,” says Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.
Prime money market funds like SWVXX are relatively low-risk investments, but they still have a degree of credit risk because they often hold corporate-issued securities like promissory notes. For even lower credit risk, a government money market fund like SNVXX, which must hold 99.5% or more in Treasurys, agency debt or repurchase agreements, is ideal. However, it does result in a lower 5% seven-day SEC yield.
Schwab Treasury Obligations Money Fund (SNOXX)
Government money market funds can still have a good deal of variety — for instance, in addition to Treasurys, SNVXX holds repurchase agreements collateralized by Treasurys and agency-issued debt from entities like the Federal Farm Credit Banks Funding Corp. and Federal Home Loan Banks. On the other hand, SNOXX excludes agency-issued debt to only focus on Treasurys and repurchase agreements.
That being said, SNVXX and SNOXX are interchangeable — while they may have minute differences in terms of credit risk, it’s unlikely to be material for the average investor. Both funds offer the same 5% seven-day SEC yield and charge the same 0.34% expense ratio. As with the previous funds, SNOXX also comes in an “ultra shares” variant with a $1 million minimum and a higher 5.2% seven-day SEC yield.
[READ: What’s the Best Treasury ETF? 7 Options for Investors]
Schwab U.S. Treasury Money Fund (SNSXX)
“Consider what is inside your money market fund — i.e., what the money market invests in,” Schulman says. “For example, Treasury income is not subject to state income tax, whereas some of the higher-yielding money market accounts that invest in short-term corporate securities will be, which can make a noticeable after-tax income difference for people in high-tax states like California or New York.”
Investors looking to minimize state taxation can therefore opt for a pure Treasury money market fund like SNSXX. This government money market fund eschews both repurchase agreements and agency debt to only focus on short-term U.S. Treasury bills, or T-bills, which have both excellent liquidity and credit ratings. It charges a 0.34% expense ratio and pays a 5% seven-day SEC yield.
Schwab AMT Tax-Free Money Fund – Investor Shares (SWWXX)
“If paying taxes is the main concern, then you may want a municipal money market fund where the majority of income won’t be subject to federal income taxes,” Schulman says. For high-income-bracket investors, this also means sidestepping the alternative minimum tax, or AMT. The Schwab money market fund to use for this role is SWWXX, which offers a 2.7% seven-day SEC yield.
This yield may seem deceptively low, but it can be more attractive when considering the tax-equivalent yield, which will generally be greater if you are in a high-income tax bracket. This is because the income from SWWXX is not subject to federal tax or the AMT, as the fund holds bonds issued by municipalities and local government entities to finance various infrastructure and public works projects.
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5 Best Charles Schwab Money Market Funds originally appeared on usnews.com
Update 06/12/24: This story was previously published at an earlier date and has been updated with new information.
