The Best Alternatives to the Money Market Account  

Last Updated: June 26, 2019
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There are different solutions other than money markets, we've collected the best of them - So let’s dive right into the details

Many investors have a lot of cash balances in these funds.

These cash-tiering strategies really help to average enough liquidity for small-term necessities. They are also very beneficial in receiving higher yields from matching fund length for future cash.

If funds move to a NAV, the ones that need overnight liquidity will probably be stored in a government market fund or FDIC-insured bank account. The long-length funds seek out short-length bond ETFs for safety.

They are both money market accounts and money market funds, but one is a mutual fund and the other is an FDIC-insured bank account.

This, of course, means they pay interest rates. These can benefit you if you need to put your excess funds on pause. However, there are different solutions other than money markets. Some offer better yields and enticing ideal rules. These all depend on what you’re searching for and what works best for you.

So let’s dive right into the three!

1. Exchange-Traded Funds (ETFs)

I see investors completely freak out over the rules being tightened and the yields getting more scarce.

If you get in an extremely short-term exchange-traded funds, this will soon be your constant “Plan: B”. ETF’s prices fluctuate throughout the day, as they are exchanged on the stock exchange. Since you can buy different securities, ETFs shoot for higher returns. Most, however, buy top-notch corporate bonds/Treasuries.

The options you have for different ETFs are almost endless. Their goal is to preserve wealth.

One of these options is constantly watched and doesn’t really follow any index  (Like index funds,). This fund also actively trades over 100,000 shares daily. They have $1.5 billion in assets, too. This ends with a very skinny bid/sell difference.

What Advantages Can I Look Forward To?

Portfolios are extremely open. Lydon says that the alternative ETFs have catalogs and rules as to what they can/cannot buy. Besides that, they promote their shares online, says PIMCO’s Schneider.  “…you can see the fund’s composition and whether it suits you,” Schneider elaborates. Despite these good signs, the funds only have to post monthly holdings.

Securities have the option to be spread out. ETFs can buy different securities with special maturities to hike up those yields. Laura warns us to be cautious of the security duration. Those funds with shorter-length securities are not as risky. They won’t suffer as much if the interest rates grow. Lengths for the ETFs are typically listed on the sites, though. See Richard Bowman’s great article about ETFs for long-term investors.

Keep in mind:

The heavily managed funds can shoot for high yields. In reference to low-interest rates, the heavily managed funds can promote bigger returns. The weakly managed funds won’t be able to sport these returns.

2. Certificate of Deposit (CDs)

A Certificate of Deposit (CD) can be thought of like a savings voucher that has a maturity rate agreed upon. The interest rates are clearly stated, and they’re issued in any category (different from the bare investment rules).

These CDs are only available when the date of maturity is met or passed. Most of the time, CDs are given out by big commercial banks. This makes them covered by the FDIC (up to $250,000).

Advantages Of CDs:

CDs typically offer greater yields than savings accounts. Since January 19, Fidelity started advertising one-year CDs. These provided 1% interest yields! If you bought a CD for $75,000 cash, you would get a yield of $750. Most savings accounts would only bring in $400-$500!

Let’s try greater than one year, though:

If you shot for a five-year CD and invest $75,000, the CD would pay a (let’s guess) 2% yield. With these numbers inserted in a calculator , we would return after five years with $7,806.06. So with our money invested and interest acquired, we would have a total of $82,806.06!

***Notice: For the basics of the example, I did not include the Marginal Tax Rate nor the Inflation Rate. I simply left them at 0%.***

Buying a CD offers different routes! You can get one at a bank or from a brokerage CD firm. These are just basically brokerages that sell the CDs. The benefits of new brokered CDs include no management fees and no transaction costs!

Some people don’t have enough coverage from the FDIC promoted by a single bank. It simply won’t cover their money. Brokerage accounts can sometimes accumulate the brokered CDs from the various FDIC banks and put them all into one account.

Therefore, you might have the option to have more than $250,000 in all CDs. All while not running the risk of insurance limits. You can get a ladder of CDs to even-out the reinvestment and gain! Brokered CDs also lets you sell your CDs if you need the money now. This allows you to get the cash before the maturity date.

This, however, brings me to my next big point of…

Disadvantages Of CDs:

If you want larger rates, expect smaller liquidity.

Example: If you have a brokered CD and want to sell it to get the funds now, before the maturity date, you would have to go to the secondary market. This now brings up transaction fees and fees they charge basically because you “couldn’t keep up on your end”. You might also have to sell it for a loss. Yikes…

3. Short-term Bonds

The spike in short-term interest rates benefits the economy. It’s a sure sign the economy is moving where it should be. But this can also cause negatives for the fixed-income searchers. Bond prices are backward in the direction of interest rates. So… when interest rates rise, bond costs will fall!

Long-term bond investors are going to be a little bit more edgy. Since the Federal Reserve is going to increase interest rates soon, the long-term bond investors are going to be hit hard. Last year, Barclay’s 10-30 Year Treasury Index (with a positive streak of 16 years) was gashed with a 13% drop.

What we feared for so long is inevitable: the interest rates will continue to rise. With comments from big, central bank officials and the Federal Reserve’s tapering calendar, these hikes should start soon. With that being said, short-term bond investors: buy now! Long-term bond investors: I’m sorry!

Short-term Bonds: Pros And Cons

The good side:

Single bonds have different ranges of credit risk and yields for different maturity expirations! You can choose a yield-risk that is best for you, and you can even ladder the securities!

The Bad Side:

You won’t be able to get the FDIC insurance like on savings account or CDs. But there is the Securities Investor Protection Corporation (SIPC) insurance for brokerage accounts. SIPC helps with losing money through your stocks and bonds.  You can get help from SIPC at one of their firms!

SIPC has a cash limit of $250,000. Their protection limit is double that, at $500,000! Just remember: the SIPC and the FDIC are not related, nor are they interchangeable. SIPC won’t protect the prices of your securities.

Pay attention:

Corporate bonds also take the risks of the company not being able to fulfill their obligations. This is known as “credit risk”. Note that you might have to settle for a lower price for your bond if you cannot find a buyer. If interest rates increase from the time you buy your bond, you could have a loss.

Just assess these risks to find out if bonds are good “Plan: B’s” for your investments. Try to spread out who you buy single bonds from, too. Have different assignors. This might take more money, but has proved to be very beneficial.

Remember the management/transaction costs

Summary

Purchasing alternatives to the money market can be tiresome and daunting- duh. These are finances!

This is your money, so you better want to know the best thing to buy to make more and safely secure what you have! Go through all of your options, assess each carefully and individually, and then go for it!

Good Luck!