Money market sweep accounts are a type of bank or brokerage account that automatically transfers excess cash into a higher interest-earning investment option, usually a money market fund. Money market sweep accounts are popular among investors who want to maximize the return on their idle cash, while maintaining liquidity and flexibility.
What Is a Money Market Fund?
A money market fund is a type of mutual fund that invests in short-term debt securities, such as Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. Money market funds aim to provide a stable net asset value (NAV) of $1 per share, and pay dividends based on the prevailing interest rates.
Money market funds are considered low-risk investments, as they are regulated by the Securities and Exchange Commission (SEC) and subject to strict rules regarding the quality, maturity, and diversification of their holdings. Money market funds are also covered by the Securities Investor Protection Corporation (SIPC), which protects investors up to $500,000 in case of a fund’s failure.
However, money market funds are not risk-free, as they are still subject to credit risk, interest rate risk, and liquidity risk. Money market funds can lose value if the issuers of their securities default or if the interest rates rise or fall significantly. Money market funds can also face redemption pressures if many investors withdraw their money at the same time.
How Do Money Market Sweep Accounts Work?
Money market sweep accounts work by automatically transferring excess cash from a client’s cash account to an investment account, where it is invested in a money market fund. The amount of cash that is transferred depends on the preset minimum balance that the client chooses to keep in the cash account. The client can access the cash in the investment account at any time, either by withdrawing it or by using it to buy other securities.
Money market sweep accounts offer several benefits to investors, such as:
- Higher interest rates: Money market funds typically offer higher interest rates than ordinary bank accounts or brokerage cash accounts, especially in a rising rate environment. For example, according to Investopedia, the average yield of money market funds as of April 14, 2023 was 4.4%, compared to 0.06% for the average savings account and 0.01% for the average brokerage cash account.
- Liquidity and convenience: Money market sweep accounts allow investors to access their cash whenever they need it, without having to manually transfer funds between accounts. Money market sweep accounts also eliminate the need to monitor the cash balance and decide where to invest it.
- Safety and diversification: Money market sweep accounts provide a safe and diversified option for investing excess cash, as they are regulated by the SEC and protected by the SIPC. Money market sweep accounts also reduce the exposure to bank failures or brokerage insolvencies, as they spread the cash across multiple money market funds.
What Are Some Examples of Money Market Sweep Accounts?
Many banks and brokerages offer money market sweep accounts to their clients, with different features and fees. Some examples are:
- Fidelity: Fidelity offers two types of money market sweep accounts: SPAXX and SPRXX. SPAXX is the default option for most Fidelity accounts, and it invests in a government money market fund that has a current yield of 4.25%. SPRXX is an optional choice for some Fidelity accounts, and it invests in a prime money market fund that has a current yield of 4.22%. Both funds have an expense ratio of 0.42%.
- Vanguard: Vanguard uses VMFXX as its default sweep account for brokerage accounts. VMFXX is a prime money market fund that has a current yield of 4.5% and an expense ratio of 0.16%.
- ETRADE: ETRADE uses ETRADE Sweep Deposit Account (ESDA) as its default sweep account for most accounts. ESDA is a bank deposit account that has a current yield of 0.05%. E*TRADE also offers other sweep options, such as ETRADE Premium Savings Account (EPSA), which has a current yield of 0.4%, and ETRADE Extended Insurance Sweep Deposit Account (EISDA), which has a current yield of 0.05% but provides higher FDIC coverage.
