Vanguard Stealthily Tests New Option for Brokerage Cash

Vanguard Stealthily Tests New Option for Brokerage Cash

May 11, 2022

Vanguard is offering a new settlement fund option for your cash—but only for some investors.

Brokerage clients who end up with cash in their account typically have it deposited automatically in a settlement or “sweep” account until they decide to withdraw or reinvest it. For Vanguard’s brokerage clients, the default sweep account is the firm’s Federal Money Market fund.

At least, that was the default. Vanguard has quietly rolled out a new option, Vanguard Cash Deposit. It’s currently available by invitation only.

For Cash Deposit, Vanguard has partnered with Valley National Bank and NexBank, where cash will be held (at one or both of those banks) to earn interest at an FDIC-insured institution. Brokerage clients will continue to access their cash through their Vanguard account.

In addition to the FDIC insurance, it’s possible that brokerage clients could earn a higher rate of interest by opting for Cash Deposit over Federal Money Market. In March, for example, Cash Deposit offered a 0.25% interest rate, well above the 0.13% yield on Federal Money Market at that time.

But, as every investor knows, interest rates have been climbing in recent weeks. The money fund’s yield is currently 0.22%. (We could not obtain current figures for the yield on Cash Deposit.)

It seems likely, however, that over time the two settlement options will offer a similar yield. You might be able to obtain a few more basis points of interest by rigorously tracking the yields offered by the two options and switching between them as necessary, but it’s unlikely to make a meaningful difference to your overall returns.

It’s not clear why Vanguard has kept so mum about this new account feature or how long they plan to restrict the offering to a select group of brokerage clients. It may be that they are testing the appeal of this money fund alternative before taking the full plunge. Of course, FDIC-insured accounts also protect investors from the possibility of negative yields. Over the past two years, Vanguard has had to waive fees on its money market funds to prevent clients from taking losses while rates hovered near zero. In the current environment, both the Malvern, Pennsylvania, fund giant and its clients may be less concerned about the possibility of negative real yields imperiling the appeal of their money market funds.

Chart of the Week: I-Bonds vs. TIPS—What’s the Best Choice?

Are I bonds better than TIPS?
Note: Chart shows interest rates at time of purchase for I-Bonds from May 2003 through May 2022 and 10-year Treasury Inflation-Protected Security yields from May 2003 through May 2022. Sources: TreasuryDirect.gov and The Wall Street Journal.

Director of Research Jeff DeMaso:

I-Bonds have gone mainstream—but are they the best option for fixed-income investors bedeviled by high inflation?

As we discussed in our recent primer, I-Bonds are U.S. government savings bonds that pay a rate of interest that adjusts every six months based on inflation. Right now, that rate is 9.62%.

Given that money markets, bank accounts and other savings vehicles are paying less than 1% and even 10-year Treasurys pay just 3% or so, that’s an incredible rate. But I-Bonds aren’t a total solution for the fixed-income portion of your portfolio. There are limits on how many I-Bonds you can purchase ($10,000 in electronic format), where you can buy and hold them, and when you can sell them.

And I-Bonds aren’t the only option for inflation protection. Unlike I-Bonds, Treasury Inflation-Protected Securities (or TIPS) have no annual purchase limit.

TIPS may seem like another obvious buy with inflation as high as it is, but they are not immune to rising interest rates. For instance, Vanguard’s Inflation-Protected Securities fund was down 6.1% year-to-date through Thursday—that’s better than Vanguard Total Bond Market Index’s 10.2% decline, but shareholders who expected the fund to keep pace with inflation have been disappointed.

The chart above compares the yields of these two inflation fighters over the past two decades. The yield on the 10-year TIPS is straightforward. For I-Bonds, we are showing the interest rate available at the time of purchase.

It’s clear I-Bonds deserve a place in your portfolio—if it weren’t for the purchase limits, I’d be hard pressed to recommend any bond other than an I-Bond today. But given the restrictions and the fact that what has gone up (the current yield) can also go down, I-Bonds may serve you best as a rainy day or emergency fund—though it takes time and planning to build that fund up. 

Podcast: Your Questions Answered—Q1 2022

You asked, we answered. During our recent webinars, we were pleased to receive a bevy of questions from participants—but there simply wasn’t enough time to answer them all. Now we’re back with our investment experts to tackle these pressing topics, including:

  • Are I-Bonds a good fixed-income option in the current market?
  • When is the right time to go to cash, and where should you keep it?
  • Is this the right environment for tax-loss harvesting?

Investors have been on a rollercoaster so far in 2022. Jeff, Steve and Charlie can help you understand how to deal with the dips. Listen now to learn more!

And if you missed them on the first go-round, click to catch up on our Quarterly Webinar and our special Bond Webinar, where we tackled even more of your questions while providing our broad outlook on the current market climate.

Adviser Investments’ Today’s Market Takeaways

In Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.

Recently, Vice President Steve Johnson discussed the market’s distinctly un-festive “Sinko” de Mayo, while Senior Research Analyst Liz Laprade discussed why tech stocks have been the market’s favorite piñata in recent weeks.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have nearly 4,000 clients across the country and over $7 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


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