By Jason Zweig

Cash is king.

If only you didn't have to pay a king's ransom to hold it.

Ever since President Trump's tariff bombshells went off on April 2, cash has reasserted itself as a valuable shelter for investors. Money-market mutual funds -- the most convenient form of cash for most investors -- have stayed stable while providing steady income that has cushioned the damage in other markets.

Yet money-market funds are surprisingly expensive, and a recent attempt to make them cheaper has been stymied. If you're like most investors, you probably pay close attention to your stock and bond funds, and little if any to your cash.

But you're probably getting ripped off on your money-market funds -- and it's one of the biggest heists on Wall Street.

Over the past couple of decades, the costs of investing have collapsed. Commissions on stocks and mutual funds have all but disappeared. The costs of holding stock and bond funds have shrunk to near-zero.

In the 1990s, the annual expenses on stock mutual funds often ran between 1% and 2% of your investment. Today, more than 50 exchange-traded stock funds charge 0.05% or less.

That's a cost reduction of more than 95%, a blessing for investors. It's often called " the Vanguard effect," driven by the ferocious competition set off by Vanguard Group and its late founder, Jack Bogle.

That stunning decline in costs has barely touched money-market funds.

Since 2015, taxable and tax-free money-market mutual funds have grown by more than 150%, to $6.91 trillion from $2.75 trillion, according to the Investment Company Institute. Over the same period, stock mutual funds (including international and balanced portfolios) grew less than 70%, to $16 trillion from $9.48 trillion.

Yet the average expense ratio at U.S. stock mutual funds fell to 0.33% annually from 0.54%, according to Morningstar -- a 39% decline.

Meanwhile, annual expenses at money funds rose slightly to 0.21% from 0.19% -- even though their assets boomed. (All these figures are weighted by the size of the funds.)

Fund investors are supposed to benefit from economies of scale, since fixed costs get spread over much larger pools of assets.

Why hasn't that happened with money-market funds?

Blame big brokers that are gouging you on cash.

For most of the period between 2008 and 2021, the Federal Reserve kept short-term interest rates so low that money funds would have yielded less than zero after expenses. So the managers waived more than $50 billion in fees.

With short-term rates back above 4%, $1 trillion has poured into money funds over the past year and fund companies can charge full freight again.

The managers are "rolling in money now," says Peter Crane, president of Crane Data, a firm that tracks cash accounts, "but they don't want to hear about cutting expenses because they just spent 10 years waiving fees."

Also, nobody had tried running a money-market fund as an ETF. So the mutual funds faced no competition from dirt-cheap ETFs.

Only last September did Dallas-based Texas Capital Bank Private Wealth Advisors succeed in launching the first money-market ETF. It quickly grew to $40 million, thanks to low fees and high yields. BlackRock's iShares followed this February with two money-market ETFs of its own.

Texas Capital Government Money Market and the iShares ETFs, Prime Money Market and Government Money Market, all charge annual fees of only 0.2%; Texas Capital yields 4.29% and the iShares funds 4.31% and 4.16%, respectively.

Meanwhile, the average money-market mutual fund available to individual investors charges 0.51% in fees and yields 3.89%, according to Crane Data.

In January, Schwab booted Texas Capital's money-market ETF; in March, Fidelity pushed it and the two iShares ETFs off its platform.

Money-market mutual funds have traditionally been extremely safe and liquid, making them work well as a cash-management account for individual investors. They offer check-writing, electronic transfers in and out, and hardly ever generate capital gains or losses.

Money-market ETFs, however, can't be used as cash-management accounts, since they trade like a stock, with slight fluctuations in value.

Across account types, Fidelity offers four default options for cash. Its Government Money Market and Fidelity Treasury mutual funds charge annual fees of 0.42% and yield 3.97% and 3.96%, respectively. Its two non-mutual-fund cash vehicles yield 2.19%.

Schwab's bank sweep, the default option for cash in taxable accounts, yields a measly 0.05%. Schwab's biggest money-market mutual fund, Prime Advantage, charges 0.34% in fees for its Investor shares and yields 4.17%. But to get that yield, you have to move your cash manually out of the bank sweep.

Fidelity says it is committed to "offering the widest range of cost-effective products," including ETFs. In this case, though, it isn't offering these cheap ETFs; it is banishing them.

"The new money-market ETFs are not only untested but potentially misunderstood by investors, as they do not deliver the same kind of experience as a money-market fund" because their prices fluctuate, says a Fidelity spokesperson.

Schwab is "not making money-market ETFs from third-party providers available to its retail and [adviser] clients," says a spokesperson, adding that "this decision is consistent with Schwab's longstanding approach of only making available Schwab-affiliated money-market mutual funds as part of its cash-management solutions."

In mid-March, Schwab filed a preliminary prospectus to launch its own money-market ETF. That shows the firm regards the concept as a positive innovation -- so long as the fees flow to Schwab rather than to a competing ETF manager.

In plain English, what both firms are saying is that they want to control your cash -- at fees and yields that are better for them than for you.

Write to Jason Zweig at intelligentinvestor@wsj.com

(END) Dow Jones Newswires

May 02, 2025 11:00 ET (15:00 GMT)

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