Wells Fargo brokerage to change cash sweep options
Wells Fargo brokerage will be changing the cash sweep option. The following is a link from the Wells Fargo website:
https://www.wellsfargo.com/investing/cashsweep/
Although not mentioned on the webpage, I believe the new cash sweep options will take effect end of July.
The current existing money market sweep options have yields in the 4+% range. For example, the money market fund I am currently using is PIVXX and this has a current yield of 4.58%. With the new sweep options, the yields, based on my cash balance, will be a very unattractive 1.5%.
For the taxable account, this is easy to deal with: just pull out all cash balances from the brokerage account and transfer the money in only when needed to pay for a stock / ETF trade.
For the IRA account, the above is not possible. Two alternatives for the IRA comes to my mind. One, to contribute to the IRA only when I am ready to make a stock / ETF trade, and two, to invest the cash balance in an ultra-short bond fund, position traded MMF or the SPDR Lehman 1-3 month treasury bill ETF (ticker BIL).
Here is the link to the related post I made on the Boglehead’s forum.
Stumble it!
June 16th, 2007 at 6:43 pm
What is a position traded MMF? Can you give an example? Thanks!
June 16th, 2007 at 10:21 pm
TFB,
A position traded MMF refers to a MMF that you have to specifically buy and sell (i.e. “trade”). For example, I can submit to buy $3000 worth of VMMXX (which is Vanguard’s Prime MMF). This option was also mentioned in the Wells Fargo link that I provided above.
Personally, I haven’t tried this option. I did perfrom a trial trade and I was able to proceed to the last trading page for buying VMMXX.
As mentioned in the Wells Faro webpage, the following applies to a position-trade MMF:
* Cash balances in your account will not be swept automatically into the fund you select
* Shares will not be automatically redeemed to cover settlement activity or debit balances in your account
* You must instruct Wells Fargo Investments to make each investment in or withdrawal from the fund, or the uninvested cash balances in your brokerage account will be swept into the Wells Fargo Cash Sweep
* Most money market mutual funds can be purchased and sold without a transaction fee; however, a minimum purchase amount and an ongoing balance requirement may apply
* Money market mutual funds settle the next business day or later
July 2nd, 2007 at 6:47 pm
Just got the notice about this in the mail today. Implementation is “on or about July 30.” Very disappointing. I guess they need some way to pay for those 100 free trades.
For taxable accounts, it looks like you can set it up to automatically sweep to a bank deposit account, so you don’t have to manually transfer in/out.
For retirement accounts, I agree that VMMXX looks like a good choice. Annoying that we’ll have to manually move the money around now, though. Amusing that now Vanguard will get the money market management fee instead of Wells Fargo. But I’m sure Wells Fargo is banking on most people not taking any action and leaving it in the Cash Sweep account. And they’re probably right.
July 2nd, 2007 at 9:00 pm
Thanks for the feedback Sol.
July 6th, 2007 at 10:06 am
I decided to use the iShares Lehman Short Treasury Bond ETF (SHV) rather than BIL because the trading volume is much higher and the bid/ask spreads are much lower. The average duration is .38 year and it currently yields 5.20%. Just a note though, you will want to purchase shares close to the beginning of the month because the interest distributions are embedded in the daily NAV.
July 6th, 2007 at 10:40 am
Dave, you make a good point on the trading spreads.
For my WellsTrade taxable account, I have pulled out all the cash. For my IRA account, I haven’t done anything. I only have about $1k sitting in cash in the IRA. I will decide when the plan goes into effect at the end of this month.
Since the NAV of BIL or SHY drops in price at the beginning of each month, I don’t think there is a difference whether the shares are purchased early or late in the month in a tax-deferred account.
But I think it does make a difference in a taxable account when
1. an investor is subjected to state taxes, AND
2. the intention is a short-term holding (sold within a year)
The reason is as follows: buying late in the month, you get a dividend that is only federal taxable but you will be able to tax harvest a capital gain loss (from the drop in NAV) from both the federal and state taxes. Or if there is no CG loss on sale, you save on having less capital gains that is both federal and state taxable.
Note: The above is my interpretation and I could be wrong.
July 7th, 2007 at 2:46 pm
Dave and all,
I am probably going to use WFGXX as the sweep in the IRA account. See this post.
July 12th, 2007 at 2:35 am
I received the literature from Wells Fargo today describing this change, and I noticed something interesting in the FAQ:
“If you currently have funds in a Money Market Fund Sweep, they will remain there and will be applied first for settlement activity until depleted.”
So, you don’t need to worry about moving the funds currently in the Money Market Fund Sweep — just new funds.
July 12th, 2007 at 7:34 am
Mike, that’s an interesting observation. Thanks for the feedback!
December 21st, 2007 at 9:41 am
[...] offers several reasonable money market funds (MMF) as cash sweep options. These MMFs were however discontinued at the end of July 30, 2007, and the new cash sweep option has a very lousy yield (1.01% APY for amounts less than $100,000) [...]