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Money Market Yields Swallowed by Fees

Posted by: Ben Steverman on January 15, 2009

It’s a sign of the times: The fees you’re paying to your tax-free money market fund’s managers are likely higher — a lot higher — than the mere pennies you’re earning from the fund.

A new issue of the Tax Advantaged Investor newsletter by Marilyn Cohen points out the trend. Cohen cites iMoneynet data showing the average tax-free money market fund yielded just 0.71% on Jan. 5. tracks non-taxable money market mutual funds. Of the nine funds listed here, five have expense ratios that exceed their most recent yields. Three of the funds have offered an annual return of less than 0.2% for the last seven days.

Investors are always advised to keep an eye on fund fees. Even on riskier and higher-yielding stock or bond funds, management fees can take a big bite out of returns year in and year out. But a negative return on a money market fund? In that case, stashing the money under mattress is looking pretty attractive.

Blame the Federal Reserve’s slashing of interest rates.

Cohen writes:

The Fed is really telling investors, “Take more risk because these non-risky assets aren’t going to yield much.” If you insist on keeping a large municipal money market cash balance, then create your own fund free of all fees.
She gives some advice for how to do so “by buying prerefunded tax free municipal bonds maturing in 2009 thru 2011.”

Bankrate notes that “many of the funds are waiving or reducing management fees to continue to provide yield.” That’s a good sign, though fees would have to go pretty low to beat some of these paltry yields.

Why would investors put up with these returns? “People are worried about getting their money back, rather than making money,” Chad Deakins of the RidgeWorth International Equity Fund told me yesterday (for an interview for a different story).

These tax-free money market funds, based on municipal debt, are pretty much as safe an investment as you can find outside U.S. Treasuries (which are taxable). Even if you have the ability to “do-it-yourself” by following Cohen’s advice, the funds she suggests buying yield just 0.75% to 1.75%, and much of those earnings will be eaten up by your transaction fees.

The environment today is such that if you want to make almost any money at all, you need to risk losing some of it.

Reader Comments


May 4, 2010 1:36 AM

great post as usual!

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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