Updated September 2023. Charles Schwab became a major player by offering discounted stock trades back when high commissions were the norm. These days, nearly every broker offers $0 commission trades on online equity/ETF trades. Where they differ is how they choose to squeeze out profit in such a lean environment. Even though Schwab will deny it publicly, they have chosen in many cases to focus on earning interest from their customers’ idle cash as one of their major sources of revenue.
Chase, Bank of America, Wells Fargo, they all make money by making money off your idle checking account balances while paying you nothing or 0.01% APY. They could all pay you more interest, but they don’t. This is why I post regular updates and monthly summaries of better banking options.
However, Schwab has the worst default cash sweep option for cash sweep amongst the “Big Three” brokerage firms by asset size (Vanguard, Fidelity, Schwab). Their mandatory default cash sweep pays only 0.48% APY as of 9/6/23.
For comparison, Vanguard’s default cash sweep is the Vanguard Federal Money Market Fund, which has an SEC yield of 5.27% as of 9/6/23. If I make a sale or receive a dividend distribution, my Vanguard cash automatically waits in this low-cost fund and earns a competitive interest rate. I may complain about how Vanguard is slipping in the customer service area, but this feature by itself is a major reason that I maintain my Vanguard brokerage account.
Fidelity has a FDIC cash sweep available as well, but they also let me switch my “core position” (their term for default cash sweep) to a higher-yield money market fund like Fidelity Treasury Money Market Fund (FZFXX) which has an SEC yield of 4.97% as of 9/6/23 or Fidelity Government Money Market Fund (SPAXX) which has an SEC yield of 4.97% as of 9/6/23. I find it amusing that Schwab was so chippy with Fidelity in this old article Zero Confusion: Setting the Record Straight. There is a reason why Schwab places that “one click” wall between you and a higher APY.
In the end, the most important thing is for you as the customer to understand the situation. Schwab still has other positive attributes and a reputation for good customer service. The good news is that there are several options for self-motivated individuals (like you that read posts like this!) who are willing to put forth a little effort to earn what could add up to hundreds or thousands in extra interest.
Manually invest in Schwab money market funds. The key is to visit this page: Schwab Purchased Money Funds for the most current fund options, minimums, and rates. These are not FDIC-insured, but they are still regulated by the SEC and required to hold very safe investments of a very short duration. Here the the available Schwab funds and SEC yields as of 9/5/23 with zero minimums. No transaction fees. There are higher-yielding options if you have more than $1 million.
- Schwab Value Advantage Money Fund® – Investor Shares (SWVXX) 5.23%
- Schwab Government Money Fund – Investor Shares (SNVXX) 5.05%
- Schwab Treasury Obligations Money Fund – Investor Shares (SNOXX) 5.06%
- Schwab U.S. Treasury Money Fund – Investor Shares (SNSXX) 5.03%
Again, these money market mutual funds can’t be set as an automatic sweep; you must manually move money in and out of the product. Every time you have a dividend or capital gains distribution, or you made a sale, you have to remember to move your cash (“sort”) into a higher-yielding option. This also means that if you want to for example buy new shares of stock, you would need to first put in an order to sell your money market mutual fund shares into cash (in order to have the funds available to buy that stock). The system won’t be able to automatically sell your fund. You’ll have to coordinate settlement times, and it may be helpful to have a margin account for faster funds availability.
Treasury bills (auction and secondary). You can buy US Treasury bills and bonds directly through the Schwab fixed income desk. You can place either an auction order for a “new” T-Bill or buy them on the secondary market. There is no commission for online orders and a $25 fee per broker-assisted trade.
Buying an outside ETF. You can also use your free stock trades to buy an ETF that is close to cash (ultra-short duration, high-quality bonds). These will not be FDIC-insured and carry a bit of duration risk, but if your ETF holds T-Bills then those are also fully backed by the US government. Here are a few ideas (note the the reported rates may lag by up to one month):
- The iShares 0-3 Month Treasury Bond ETF (SGOV) has an effective duration of 0.10 years. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has an effective duration of 0.08 years.
- The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) and the iShares Short Maturity Bond ETF (NEAR) hold a portfolio of investment-grade bonds with an average duration of ~6 months.
Bottom line. Charles Schwab has a default cash sweep option with a relatively tiny interest rate. To earn more, you must do some research and manually buy one of the alternatives listed above that can earn ~10x more.
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Thanks Jonathan
Thanks Jonathan. Unlike Fidelity or Vanguard which have huge asset management business, Schwab’s is substantially smaller. They have to make revenue somehow. Net interest margin and payment for order flow are their bread and butter. Schwab still offers a compelling value proposition one which I am happy to click a few buttons to move my cash manually for. I do however think that forcing clients to hold low yielding cash in Intelligent Portfolios is by far their biggest mistake and failure to “see through the client’s eyes”
Schwab Intelligent Portfolios seems to have a pretty decent yield: 4% in March, 4.38% in April. A far cry better than the 0.45% that the non-intelligent account offers. I’m guessing they make up the difference in “net interest income” by investing in Schwab ETFs.
You can’t buy the money market ticker on the desktop app. You have to use he web interface. Maybe not a big deal for some, but an inconvenience nonetheless. There’s taxable and non-taxable money market so be aware if you’re buying on taxable accounts. For my Roth, I bought the taxable money market since the interest is higher and taxable is not relevant on my Roth IRA.
Jonathan, thanks so much for speaking out on this. I’m having the same issue with SoFi and Merril, two very different companies. I’m looking at leaving both of them, any suggestions on where to go?
Well, here’s my overall setup:
Vanguard – most of my overall portfolio, best cash sweep
Fidelity – most of my self-directed individual stocks, good cash sweep
Merrill Edge – just ETFs that distribute once a quarter, to qualify for Preferred Rewards. I manually sweep out quarterly if not reinvesting.
Most other smaller brokers offer limited good cash sweep options. SoFi at least you can transfer to their bank side which offers decent APY.
Why not move the Fidelity assets into Vanguard? One tax form fewer that way.
You mention that
“Treasury bills (auction and secondary). You can buy US Treasury bills and bonds directly through the Schwab fixed income desk. You can place either an auction order for a “new” T-Bill or buy them on the secondary market. There is no commission for online orders and a $25 fee per broker-assisted trade.”
However the way this is worded got my all excided that there is no commission for secondary treasury trades. There is however $1 per bond ($1000?)
https://www.schwab.com/fixed-income/pricing
I will be buying my first Treasury Bonds soon with thier 5% yield and wanted to see if I could save some.
Look below that section to “Treasuries – new issues and secondary trades”.
I have my emergency cash fund split between boring old Marcus for FDIC insurance and Vanguard for the VMFXX “cash sweep”.
There is an argument that MMF are not “safe”. I’ve read articles on the 2008 Great Recession and think that MMF are almost but technically legally not as safe as FDIC insurance. After an institutional MMF “broke the buck” because of high redemptions and they were holding Lehman Bros and Goldman Sachs bonds, the government started a temporary insurance program for MMF. No additional MMF “broke the buck”.
There were further reforms in 2010 and 2014 that made MMF more conservative and more liquid. I feel that MMF are less likely to “break the buck” in the face of economic crisis and rush to redemptions.
I’m having the same questions and issues as some of you other guys. Accounts at Fidelity, Merrill, an old employer directed Vanguard account, and also toying with SoFi but have not moved to SoFi 100% for everyday banking because I’m still on the fence about them for that. What is your go to for everyday banking, assuming you’d be better off looking elsewhere than just about any banks savings rates, and you could use several options of MMF’s for better interest? I like BOA for the Merrill tie in, and the whole interface is very user friendly, but I also like SoFi’s Vault? Thoughts? Thanks
Jonathon, can you speak on the difference in the tax implications of purchasing the Schwab money funds in the account versus the Vanguard Cash sweep and also versus Interest from savings accounts. Thank you
Jonathon, I appreciate that article, but not the rec on VMFXX. You’re quoting returns of 3.88%, but that’s since inception in 1981. The fund has done 0.7% over the past 10 years. I’ll definitely look into alternatives and I’m glad this article brought the issue to my attention with the recent transfer of funds taking place from TD Ameritrade over to Schwab and the auto-sweep.
If you are an active trader a sweep account is a necessity. To physically move cash to cover your trades, especially if you place limit orders where filling a trade may or may not happen is an impossibility. You may trade with Schwab for “free” , however, with Schwab there’s no such thing as a free lunch……
Thank you for the information provided in your well written article, I will be sure to make the necessary changes.
I opened a DCP457 account with Schwab in Feb 2023, and my cash automatically goes to Schwab Bank Sweep. In June 2023, I opened second retirement plan, TSA 403, but this one the cash automatically goes to Schwab Government Money Fund (SWGXX).
Great piece. I have all of our money at Fidel now but their active trader tools kind of suck, relatively. Then again, in the long run, (though I’m 71 now) I probably shouldn’t be doing active (day) trading anyway. OTOH, you could say that an advantage of Fidelity is that you don’t have as many day traders in the same boat as you because of their tools and no futures trading.
Both Schwab and Thinkorswim (with their addictive trading interface and relatively high commissions on futures) are abysmal when it comes to cash sweeps. A lot more significant these days.
Vanguard basically has NO customer service. Even when I send an email with an inquiry I get incorrect information! I have accounts at Fid Schwab Van and ML. Customer service at Fid and Schw are in par. ML poor and Van poor!
I agree, Vanguard is focusing their energy on the wrong things (growth not customer service). I am moving over some assets to Schwab to test them out.
I moved everything to Schwab about a year ago because of the absolutely atrocious customer service. The wait on hold exceeded 20 minutes back then. Schwab assigned an advisor to me, gave me a rather large bonus for moving to their platform and their service has been excellent. I agree it’s a pain to manually keep up with the maturities of a bunch of CDs and bonds so as not to lose interest on idle cash – but it’s worth it to me and keeps me invested in managing the account.
A little bit out of left field….does anyone know of a 529 that has tbil/tbills access? Think tbills/treasuries may be a good part of a 529 since the rates are ~5.5%