E*Trade money market funds earn yield by holding extremely safe, short-term assets, such as U.S. Treasury bills. As a result, they’re one of the most popular investments for E*Trade customers to park cash. These funds range from Treasury-only money market funds to prime money market funds which will also hold short-term corporate debt. In this article, we’ll explain the different types of money market funds on E*Trade, compare each fund’s rates and tax benefits, and review the best money market fund options for your cash.
E*Trade Cash Options
E*Trade’s default cash sweep product is the Bank Deposit Program (“BDP”). This is the only sweep vehicle available to most investors on the E*Trade platform. However, if you have anything less than $500,000, you’ll get a measly 0.01% APY. E*Trade will give you an APY of 0.05% for deposits over $500,000 and a 0.15% APY over $1,000,000, so the default rates for higher deposits aren’t that much better.
This is a disappointment and means we’ll want to find a solution for our cash. Many folks gravitate towards options such as money market funds, Treasury bills, brokered CDs, and ultra short-term Treasury ETFs. We’ll focus on the various money market funds that E*Trade provides its customers, which pay over 500x higher yield than their default sweep account.
What Are E*Trade Edge Money Market Funds?
Money market funds are mutual funds that hold extremely safe investments, such as U.S. Treasury bills. They’re a popular place to park cash. E*Trade money market funds are categorized across three types: government, prime, and municipal.
- Government money market funds must invest 99.5% of the fund’s assets in short-term, low-risk securities issued by the U.S. government, such as Treasury bills, and other extremely high-quality debt backed by U.S. government securities.
- Prime money market funds are slightly more risky. In addition to U.S. government debt, prime money market funds hold short-term debt issued by companies and banks. In exchange for the increase in risk, prime money market funds historically offer higher yields than government money market funds.
- Municipal money market funds aim to generate interest income exempt from federal income tax by investing at least 80% of its assets in municipal securities.
E*Trade offers a wide variety of money market funds from various investment firms. These funds range from those with no minimum investment to institutional funds which can require an initial investment of $1,000,000. Our preference on E*Trade is for the Vanguard funds with a minimum investment of $3,000, in addition to a few other Treasury and prime money market fund choices, reviewed below.
Main Reasons to Consider E*Trade Edge Money Market Funds
Money market funds offer three major benefits: liquidity, high yields, and stability. A traditional savings account might offer you yields and stability, but no liquidity. If you invest in stocks, you might get higher returns and similar liquidity, but no stability.
Money market funds aim to deliver a balance of all three:
- Liquidity: Money market funds on E*Trade settle in one business day (T+1). Meanwhile, brokered CDs on E*Trade are less liquid and harder to sell. With money market funds, you don’t experience any restrictive features banks impose on you, like early withdrawal penalties.
- Higher Yields: Money market funds on E*Trade will adjust their rates in real time, so you’ll always get the most competitive rates. As we’ve seen, the default sweep from E*Trade pays a meager 0.01%.
- Stability & safety: E*Trade money market funds only invest in short-term, low-risk investments. They’re much less prone to market fluctuations than other investments.
Let’s walk through each of these benefits in more detail.
E*Trade Money Market Fund Liquidity
Money market funds are very liquid investments and can be easily bought and sold. The money market funds offered on E*Trade’s platform manage hundreds of billions of dollars in assets. Hundreds of millions worth of E*Trade money market funds trade hands daily, making it very easy to purchase and sell.
As mentioned earlier, money market funds have a settlement time of one business day (T+1). That means a money market fund sold on Tuesday will settle on Wednesday, which is when you’ll have the cash in your E*Trade brokerage account available for withdrawal.
The Potential for Higher Yields with Money Market Funds
Money market fund rates are currently paying much higher than bank savings rates, most bank CD rates, and E*Trades default cash sweep program. Money market rates will fluctuate, compared to fixed rates paid by products like E*Trade’s brokered CDs. This means we can count on money market funds to pay us a competitive rate, unlike banks which usually offer promotional CD rates.
E*Trade is owned by Morgan Stanley. The cash in your E*Trade account gets swept into Morgan Stanley Private Bank, which uses your money to generate revenue investing in highly secure assets like Treasury Bills and keeping the profit for themselves. They then pay a small fraction of the earnings they receive from these investments back to customers like us.
However, when we choose to invest in money market funds, which are composed of short-term, low-risk investments that also include Treasury Bills, we effectively regain a portion of this income for ourselves. E*Trade also sells brokered CDs, often paying competitive rates with E*Trade money market funds. Buying these CDs is one of many ways to earn a yield with your E*Trade cash, but they’re usually less liquid than money market funds.
Money Market Funds Offer Stability and Safety
Money market funds are considered to be very safe investments. Federal regulations require money market funds to hold short-term, low-risk, highly liquid investments, so these funds are very stable investments.
Money market funds primarily invest in instruments such as U.S. treasuries. U.S. treasuries are backed by the U.S. government, which means the U.S. government guarantees they’ll pay interest payments and your original investment at maturity. In particular, Treasury money market funds only hold U.S. Treasury bills, virtually risk-free investments.
It’s important to note that money market funds are investment products, so they are not FDIC-insured. E*Trade brokerage accounts are instead covered by the Securities Investor Protection Corporation (SIPC). The SIPC will cover up to $500,000 in securities, which includes money market funds, including a $250,000 limit for cash held in a brokerage account.
Tax Advantages of Some Money Market Funds
While all income from money market funds is taxed at the federal level, certain E*Trade money market funds have state tax benefits (shown in the table below). The amount of state tax benefit depends on the proportion of U.S. Treasury bills being held by that money market fund. All U.S. Treasuries are always state-tax exempt, so the more Treasuries a money market fund holds, the higher the exemption.
Certain money market funds are called “Treasury money market funds” because they only hold U.S. Treasury bills. These funds benefit from the highest state-tax exemption, sometimes up to 100%.
How Do I Buy E*Trade Money Market Funds?
Buying and using E*Trade money market funds is straightforward. First, log into your E*Trade account.
Then, navigate to Mutual Funds under the ‘Trading’ tab on etrade.com. From there, type in the symbol of the fund you want to buy and go through the order process.
To do more research, click Mutual Funds under the “Markets & Ideas” tab. Under “Fund Category” in the filter section, select “All” under “Money Market”.
Compare E*Trade Money Market Fund Rates and Options
Below is a table that compares all E*Trade government and prime money market fund rates and options. This list excludes funds with a high minimum investment and municipal funds, which are dependent on what state you live in. We’re left with six money market fund options, primarily made of Vanguard funds.
The money market funds listed below are available to all E*Trade brokerage users. For easy comparison, we’ve also collected the returns for each fund from last year, and any relevant state tax exemptions.
Here are our thoughts on the options.
The Vanguard funds listed are all government money market funds with a minimum investment of $3,000. It’s difficult to go wrong with any of them, although you may want to pay attention to the state-tax exemption if you live in a high-tax state.
VUSXX (Treasury Money Market Fund) is Vanguard’s Treasury-only money market fund, which means it only buys Treasury bills. In 2023, it had a state-tax exemption of 80%, which applies to all residents, including those who live in California, New York, and Connecticut. GABXX (Gabelli U.S. Treasury Money Market Fund) is also another Treasury-only MMF option with a slightly cheaper expense ratio. In 2023, GABXX slightly outperformed VUSXX due to better management.
Then, you have the two prime funds we recommend with no minimum investments: PCOXX and WMPXX. Both these prime money market funds offer higher yields than their government money market fund counterparts due to riskier holdings. However, prime money market funds don’t usually benefit from any state-tax exemptions, which is the highest in Treasury-only money market funds,
Are E*Trade Money Market Funds the Best Place For My Cash?
Buying E*Trade money market funds is much better than letting our cash get automatically swept into E*Trade’s Bank Deposit Program where we earn effectively nothing.
We are disappointed that E*Trade does not offer a high-yield sweep feature. Meanwhile, Fidelity’s SPAXX and Vanguard’s VMFXX are both high-yielding sweep vehicles treated like cash with instant settlement.
Given that we have to deal with a one-day lag to get our cash and we have to manually buy and sell, we prefer ultra short-term Treasury ETFs, such as SGOV, USFR, and TFLO. These ETFs pay as much as prime money market funds with lower risk since the ETFs only hold Treasury bills. In addition, we only have to wait an extra settlement day compared to the money market funds. More details can be found in our comprehensive E*Trade cash guide.
In general, E*Trade money market fund rates are competitive with the funds found in other brokerages. However, the lack of a high-yield sweep and cash treatment sways our recommendation in favor of other E*Trade cash investments.
