Over the past few years, a handful of bank savings accounts, particularly internet banks like ING Direct and HSBC Direct, have at times had a yield advantage over money market mutual funds. These offerings have attracted a lot of money and have lured a lot of people into believing that they are better off in these accounts. Don’t believe it.
Historically, money market mutual funds have provided more liquidity (no transaction limits), almost twice as much yield, and dare I say even more safety than bank deposits. Since the first money fund (Reserve Fund) was created in 1971, money market funds have provided investors with more interest income than bank savings accounts have provided since the beginning of time. Yield income likely totals around $500 billion, while banks during the period money funds were in existence like paid around $300 billion.
So now some Johnny-come-lately outfits show up saying their lack of “bricks-and-mortar” gives them a cost advantage over traditional banks? I say bull. These banks are merely trying to gain assets fast, and then trying to hope that investors don’t notice when they put the screws to their savers, like every bank in the history of civilization has done. Note ING Direct, which had been the market leader in 2003 and 2006, now paying a paltry 4.4%. This would rank it well below even the handful of money market funds that pay a full percentage point in expenses. So the highest rate becomes the lowest….
Over their history, only one money market fund has ever given investors less than their dollar back (“broken the buck”). In 1994, the institutions-only fund Community Bankers U.S. Government Money Market Fund, liquidated for $0.94 cents, and investors eventually got $0.02 more back after all the lawsuits, so in the worst disaster in history caused money fund investors to lose 4 cents on the dollar. And had they been in the fund the year prior to the blowup, they would have earned about 6 cents a dollar in income! All other events have seen investors “bailed out” by fund companies, though these incidents are few and far between, and were problems totalling in the millions not billions.
Banks, on the other hand, have taken taxpayers, and in some cases depositors, for trillions. I would guess that all the bank problems we’ve had over time have cost $500 billion (with a ‘b’) vs. problems with money funds, which likely total $250 million (just over a basis point, or 0.0001 of the current $2 trillion). All but $4 million of this was covered by fund companies.
So perhaps you might find a higher yielding option among banks temporarily, but historically money funds have been the better deal. You’d rather have the market deciding what rate you get than a banker. Eventually, it comes down to a choice between you earning the extra dollar or the banker earning the extra dollar; the banker usually wins.
