A client recently asked if, given the turmoil in Europe and the substantial stake that US Money Market funds have invested one way or another with European banks, he should be reconsidering money market funds, and particularly, whether perhaps he should be parking cash in a savings account or other alternative.
He provided the link to an interesting article in Reuters about the issue:
That said, it still makes sense to minimize risks. If you are using a money market fund as a cash alternative, stick with a large, well-run, *cheap* fund such as Vanguard's Prime MMF or other similar funds.
One more point in favor of the cheap funds - they can afford to keep the most conservative portfolios since they don't need to take the risks which come with higher yielding securities to make up high costs. Most of them have large allocations to US treasuries.
And regarding any concern that treasuries might default, the alternatives are no better - a bank savings account backed by FDIC is, ultimately, still backed by the same government which is backing the treasuries.
On the way to all of this, though, I found an interesting letter that an advisor was sending to his clients. He uses Fidelity as a custodian and was moving all their (taxable) money market funds from Fidelity's Cash Reserves (their default money market fund) to Fidelity's US Treasury MMF. His reasoning was this - neither of them was generating enough internal income to pay the yield they are paying out in the first place - both have equal non-existent yields of 0.01% right now, and most of even that is due to the fund company waiving fees to make it happen. So long as you are ending up with the same thing in your pocket either way, his logic was to take advantage of Fidelity and put the money into the less (credit) risky of the two funds.
Interesting logic, and sensible, however, it does require that if the crisis passes and ultimately yields start to go back up, you need to watch the two funds and, probably, will want to move back to the one which is less subsidized by the fund company. Those subsidies do eventually have to go away and at that point, there will again be a real yield difference between the two.
I'd love to hear other folks thoughs on the issue.
Thanks
--David