Cash Sweep Options at Vanguard
Vanguard offers just a few choices for free cash balances. Some customers have more choices than others. Read on for the details.
Default Vanguard Core Position
Uninvested cash in a brokerage account at Vanguard will be automatically moved to a money market mutual fund. Right now, this is VMFXX, the Vanguard Federal Money Market Fund. There’s nothing the account owner needs to do. Vanguard does this automatically with any amount of money that is not invested (there is no minimum purchase amount).
VMFXX currently has a 7-day yield of 2.8%, which is pretty high by money market standards. The fund invests in cash and obligations that are backed by the U.S. government. In total, there is about $216 billion of this stuff, so it’s a very large fund. The expense ratio is 0.11%.
The fund attempts to maintain a Net Asset Value of $1.00, although there’s no guarantee it will always do this. The average maturity of the bonds in the fund is just 17 days, so it’s a pretty steady fund. Like other Vanguard funds, there are no loads and no transaction fees (when purchased through Vanguard).
There is no minimum hold period on this fund, which Vanguard calls the settlement fund. An account’s withdrawals and deposits are pushed into this fund and taken out automatically. It’s similar to a bank account, but it’s not quite the same process. Shares of the fund must actually be sold before a withdrawal can take place, and this can add an extra business day of time before a withdrawal can be completed.
Shares of VMFXX (which should equal the dollar amount in the fund) are protected by SIPC, not FDIC. The fund is considered a security, not cash, which means it receives up to $500,000 in insurance.
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Vanguard Cash Deposit
Vanguard is currently rolling out a second choice for idle cash. It is called Vanguard Cash Deposit. Unlike VMFXX, this one is FDIC insured. Vanguard is able to offer FDIC protection because it moves uninvested cash to program banks (currently Synovus Bank, NexBank, and Valley National Bank with more on the way) that offer FDIC insurance.
Although FDIC protection is a big perk, this option currently pays a lower interest rate (2.10% at the time of publication). The big advantage, though, is that the cash program is guaranteed not to break the buck, meaning the deposit won’t decrease in value.
Also, because Vanguard is using multiple banks, it’s possible to capture more than $250,000 (in fact, more than $500,000) in protection. After reaching the FDIC limit of $250,000, additional cash will be moved to a second bank, and so on, until all banking partners have been exhausted. Vanguard has at least 6 banks on its list who are currently accepting deposits from the program or who will be in the future.
Other Vanguard Money Market Mutual Funds
If neither of the first two choices appeals to you, there is always buying shares of other money market mutual funds. Vanguard has 5 other funds that fit the bill. They all have a minimum initial purchase amount of $3,000, and that’s the first disadvantage compared to the default money market fund.
Some investors in some locations, however, may find the other choices more appealing. For example, 3 of the funds invest in municipal bonds. Thus, they may have tax advantages in some situations.
The muni money market funds are:
VMSXX, the Vanguard Municipal Money Market Fund
VCTXX, the Vanguard California Municipal Money Market Fund
VYFXX, the Vanguard New York Municipal Money Market Fund
All three of these funds have higher expense ratios than VMFXX and lower yields.
The other two funds are:
VMRXX, the Vanguard Cash Reserves Federal Money Market Fund
VUSXX, the Vanguard Treasury Money Market Fund
These two have lower expense ratios and higher yields.
Comparison
Majority of brokerage firms offer very low interest on investors' uninvested cash. TD Ameritrade's
cash sweep rates, for example, are 0.01%.
Ally Invest
offers the highest in the industry rate
of 2.1% APY
on its online savings account that could easily be linked to its brokerage account.
M1 Finance
offers a checking account that comes with 1.7% APY.
However, that checking is part of the broker's
M1 Plus program, which costs $125 a year.
VanguardAdvantage
Vanguard’s cash management account, VanguardAdvantage, has been retired and is no longer available.
Selecting the Vanguard Core Position
As already mentioned, every brokerage account at Vanguard is automatically signed up for the
Vanguard Federal Money Market Fund as its core position. The FDIC-sweep program is currently invitation-only. You’ll need to receive an email or letter in the mail from Vanguard in order to sign up for this one.
As for the other money market mutual funds, these can be purchased like a regular mutual fund. On the website or mobile app, just enter the ticker symbol of the fund you want to invest in. Once on the fund’s profile, click on the buy button and follow the prompts.
Vanguard’s mutual fund order ticket is a little tricky. Make sure you don’t buy shares of the “Federal Money Market,” as this is the settlement fund.
Updated on 10/4/2022.
Chad Morris is a financial writer with more than 20 years experience
as both an English teacher and an avid trader. When he isn’t writing
expert content for Brokerage-Review.com, Chad can usually be found
managing his portfolio or building a new home computer.
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