Charles Schwab offers a variety of money market funds, which are an effective way to earn additional yield and income on cash. Some Schwab money market funds invest in only Treasury bills, while others hold slightly riskier assets such as short-term corporate debt. In this article, we’ll go over the different Charles Schwab money market funds, compare the best rates, and explain why money market funds are a solid investment to park cash.
Charles Schwab Cash Options
Charles Schwab’s default cash sweep product is the Schwab Bank Investor Savings account. Any cash that you have in a Schwab brokerage account gets automatically swept into Schwab Bank. Unfortunately, money in this bank account gets paid a measly 0.48%.
Meanwhile, Fidelity and Vanguard offer automatic sweep positions into their government money market funds, which currently pay around 5%. Schwab does not offer such a generous sweep feature, which is a disappointment.
So, it’s up to us to figure out what to do with our cash on Schwab.
Luckily, Schwab money market funds pay higher yields than Schwab’s default sweep account. The main funds we’ll review are the ones with no minimum investments. They are as follows:
- SWVXX (Schwab Value Advantage Money Fund – Investor Shares)
- SNVXX (Schwab Government Money Fund – Investor Shares)
- SNOXX (Schwab Treasury Obligations Money Fund – Investor Shares)
- SNSXX (Schwab U.S. Treasury Money Fund – Investor Shares)
SWVXX is a prime money market fund, whereas SNVXX, SNOXX, and SNSXX are government money market funds.
What Are Schwab Edge Money Market Funds?
Schwab money market funds are mutual funds that invest in short-term, low-risk securities. They can be split into three categories: government, prime, and municipal.
- Government money market funds specifically hold securities issued by the U.S. government, such as Treasury bills, and other extremely high-quality debt that’s backed by U.S. government securities. Schwab’s no-minimum investment funds include SNVXX, SNOXX, and SNSXX.
- 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. Schwab’s no-minimum investment funds include SWVXX.
- 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. Municipal funds are a type of tax-exempt funds. Schwab’s no-minimum investment funds include SWTXX (Schwab Municipal Money Fund – Investor Shares), SWKXX (Schwab California Municipal Money Fund – Investor Shares), SWYXX (Schwab New York Municipal Money Fund – Investor Shares), and SWWXX (Schwab AMT Tax-Free Money Fund – Investor Shares).
Schwab offers two classes of each money market fund — Investor Shares and Ultra Shares. Money market funds with the Investor Shares class have a minimum investment of $1, whereas Ultra Shares have a minimum investment of $$1,000,000. Money market funds with the Ultra Shares class have a lower expense ratio than their Investor Shares counterpart.
Main Reasons to Consider Charles Schwab Edge Money Market Funds
Money market funds offer three major benefits: liquidity, high yields, and stability. Traditional savings accounts yield and stability with little liquidity. Stocks can provide higher returns, but little stability.Money market funds aim to deliver a balance of all three:
- Liquidity: Money market funds on Charles Schwab settle in one business day (T+1). Money market funds are generally much more liquid than brokered CDs. There are also no silly early withdrawal penalties or holding restrictions like in bank CDs and savings accounts.
- Higher Yields: Money market funds almost always offer the potential for higher yields than the products from your bank. As we’ve seen, the default sweep from Schwab pays 0.48%. Meanwhile, Schwab money market fund rates adjust in real-time, so you’ll always get the most competitive rates, which the bank isn’t incentivized to provide you.
- Stability & safety: Schwab 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.
Schwab Money Market Fund Liquidity
Money market funds are very liquid investments and can be easily bought and sold. The money market funds offered on Schwab’s platform have hundreds of billions of dollars in assets under management. Hundreds of millions worth of Schwab 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 Monday will settle on Tuesday, which is when you’ll have the cash in your Schwab brokerage account available for withdrawal.
Schwab Money Market Fund Higher Yields
Money market fund rates are currently paying much higher than bank savings rates, most bank CD rates, and Schwab’s default cash sweep program, but lower yields than its CDs.
Schwab Bank generates revenue by utilizing customer deposits to invest in highly secure assets like Treasury bills. They then pay a small fraction of the earnings they receive from these investments back to customers like us. However, when we invest in money market funds that comprise Treasury bills, we effectively regain a portion of this income. We can also directly buy Treasury bills on Schwab by ourselves.
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 (which only hold U.S. Treasury bills) are virtually risk-free investments.
It’s important to note that Charles Schwab money market funds are investment products, so they are not FDIC-insured. Schwab brokerage accounts are instead covered by the Securities Investor Protection Corporation (SIPC). The SIPC will cover up to $500,000 in securities including money market funds. There is a $250,000 coverage limit for cash held in a brokerage account.
SNSXX State Tax Exemption and Schwab Money Market Funds Tax Advantages
While all income from money market funds is taxed at the federal level, certain Schwab 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 Schwab Money Market Funds?
Buying and using Schwab money market funds is straightforward.
To purchase a Schwab money market fund, simply navigate to the ‘Trade’ section on Schwab.com. From there, select the account in which you want to buy the fund and click ‘Buy a mutual fund.’
Enter the money market fund symbol and the dollar amount you wish to invest. After reviewing your order details, click ‘Place Order’ to complete the transaction.
If you’d like to do more research, click Money Market Funds under the “Research” tab.
Compare Schwab Money Market Fund Rates and Options (SWVXX vs. SNVXX. vs. SNOXX. vs SNSXX)
Below is a table that compares all Schwab government and prime money market fund rates and options. This list excludes Investor Shares funds with a minimum investment of $1,000,000 and municipal funds, which are dependent on what state you live in. In total, we’re left with four money market fund options.
The money market funds listed below are available to all Schwab brokerage users. For easy comparison, we’ve also collected the returns for each fund from last year, and any relevant state tax exemptions.
As you can see, SWVXX (Schwab Value Advantage Money Fund) offers the highest yield given that it’s a prime money market fund. Meanwhile, SNVXX (Schwab Government Money Fund) and SNOXX (Schwab Treasury Obligations Money Fund) are government money market funds.
SNSXX (Schwab U.S. Treasury Money Fund) is a special type of government money market fund, called a Treasury money market fund. Treasury money market funds exclusively hold Treasury bills, and thus benefit from the highest state tax exemption, which means your income is not taxed at the state level. SNVXX and SNOXX hold a lower percentage of Treasury bills, and thus their tax exemptions are less, with no benefit for California, New York, and Connecticut residents.
Are Schwab Money Market Funds the Best Place For My Cash?
Buying Schwab money market funds is certainly better than letting Schwab automatically sweep your cash into their Schwab Bank savings account. But, we’re disappointed that Schwab does not offer a high-yield sweep feature, like Fidelity or Vanguard. In addition, Schwab does not treat its money market accounts as cash, which means we have to wait one business day after selling a money market fund for our cash. Compare this to Fidelity’s default core position SPAXX and Vanguard’s default settlement fund VMFXX, where we can instantly settle and sweep in and out of the funds as if they were cash.
Given that we have to deal with a one-day lag and manual buying and selling anyway, we prefer ultra short-term Treasury ETFs, such as SGOV, USFR, and TFLO. These ETFs pay a higher yield and require waiting an extra day of settlement compared to the Schwab money market funds. If you prefer CDs for their higher yields, Schwab’s brokered CDs can be bought but are generally less liquid and harder to sell.
In general, Schwab money market fund rates are competitive with the funds found in other brokerages. But the lack of a high-yield sweep and cash treatment sways our recommendation in favor of other Schwab cash investments.
