LOF Money Market ETFs
Freddie: Money market funds and ETFs. How do money market funds and ETFs compare to traditional CDs in terms of safety and returns? Are they good for short term alternatives for retirees looking for better yields? We'll find out.
Hello again and welcome to Leibel On Fire. I'm Freddie Bell, and with me is Amazon's bestselling author of Living with Financial Anxiety and also the book called Authenticity. He's Leibel Sternbach and it's my pleasure to welcome you to the show today. Hello Leibel.
Leibel: Hey, how are you doing today?
Freddie: I'm doing well and I can't wait to talk to you about money market funds, and that's a big topic here for this show, and I'm wondering what are the key differences, if we can just dive right into it.
What are the key differences between money market funds, short-term ETFs, and traditional CDs that retirees should understand before investing? I know there's three questions in one. I said one question, but that's three questions for you right there to start the show.
Leibel: Those are all great questions. Those are all interlinked questions.
Let's see if we can get to it. So, alright. Money market funds is the thing that we're all used to, right? And it is a highly regulated type of security that the SEC mandates. And this, actually, this was a mandate that came after 2008 when the money market funds actually broke a dollar.
They went under a dollar and which had never happened before. But the SEC mandates that the money market funds are pegged to a dollar. And so you put in a dollar, you know you have a dollar value, and then they buy these very short term treasuries from the United States government, and they pay out interest on it.
But essentially they're mutual funds that keep your value at a dollar. So you always get your dollar back when you sell it.
And then you get an interest rate that fluctuates loosely based on what the federal fund rate is, right? So, right now the federal fund rate is somewhere between what is it, 4.25 and 4.5%. So that is what you're gonna get on those funds minus their management fee.
And then if you got a money market account, right? So that is, the bank is gonna give you access to that as a checking account or a savings account. They're going to take a fee for that, right? So not only are you taking that 4.25, and then you're subtracting the management fee for the mutual fund, but the bank is then charging you a convenience fee
for allowing you to swipe your card on it or to just transfer money back and forth. So generally those money market accounts then pay, like if the going rate is 4.25, you're getting like 3.25, right. Or you're getting, 3.5. Those come in the flavor of money market accounts and then high yield savings.
Kind of the next thing that you have is, and this is the thing that I always put my clients into, right? Rather than buying money market accounts or money market funds, which you feel nice because it's, you got a dollar, you know it's a dollar there, and then once a month you get an interest payment, kind of like a bank.
What I like to get people into is money market ETFs or ETFs that track the zero to three month treasuries and money market ETFs is something that the SEC just approved very recently. So those are ETFs that can peg to a dollar and act like a mutual fund but give you the interest. So those are nice 'cause you can sell them within the day.
Whereas the money market you had to sell at the end of the day with the money market ETFs or the short term treasury ETFs, you get more return because instead of it being a mutual fund, it's an ETF so that interest gets accrued every single day, but it gets accrued inside the vehicle of the ETF.
So if you decide you buy it on Monday and you decide to sell it on Wednesday, you are going to sell it with that interest baked in. Whereas with the money market fund, you gotta wait until the interest gets paid a month later. Right. So you don't get it and you don't get that money. And you're waiting for that interest and you're not exactly sure what that interest is gonna be.
So I like the short term treasury ETFs over money market funds because you got that accrual every single day and you can see exactly what it is.
Freddie: We're talking today about money market funds and ETFs. So talk to us if you don't mind and share in terms of safety yield potential, and maybe even liquidity.
Tell us about what retirees need in order to access the cash and the reliable income.
Leibel: So we're talking about your spending money, right? And we're talking about the reason why you're gonna go into a money market fund or to a high yield savings cap, or even a cd, right?
With a cd you lock it up for like, three months, six months, a year, whatever, right? And they all kind of work the same way, right? The reason why you're locking up your money or you're putting it in there is 'cause you don't wanna lose value. You wanna earn something for giving up access to your money.
The question you gotta ask yourself is, do you really need to be giving up access to that money? And are you getting the greatest amount of return that you could be getting for your money? Right? So the least amount of risk is give it to the bank and that it's not necessarily the least amount of risk, but you can give it to the bank, put it on a high yield savings account.
You have access to whenever you want, but you're gonna get the least amount of savings, the least amount of interest. So now there's a two step process, right? You gotta put it in a brokerage account. You gotta go buy something that's investing in the treasuries in the federal government, or go directly to the federal government's website and, treasury website and purchase the bonds directly.
So now you got a few steps involved, but in, in exchange, the reward for doing those few steps is you get more interest, right? And then if you buy it as an ETF format, that interest can accrue every single day. And then you can go step up even more and you can say, well, maybe I'm gonna expand beyond the federal government.
Maybe I'm gonna go to Microsoft, I'm gonna go to Amazon, I'm gonna go to Google. I mean, these are major corporations. They're not going bankrupt anytime soon. And if I loan them money for three months, or nine months or a year. They're gonna pay a better interest rate than the federal government because they're not the federal government.
But is the risk of giving them money really that much more significant than giving it to the federal government? And I think the answer is kind of no. Right? Like,
Freddie: right. So what are the steps in making those determinations though?
Leibel: Of whether to give it to the federal government or to give it to the corporations, like to Microsoft.
Freddie: Right,
Leibel: Well I think that becomes a kind of a slippery slope that as an individual investor, it's very hard to articulate that. But you gotta look at the risk and reward, right? So last year, we were getting 5, 5.5 percent of money for the federal government, right.
And you can buy that in an ETF format. Very easy to do, right? Two clicks, and you have that and you're getting 5.5 percent. And corporates were paying like 6%, right? So Microsoft was paying 6% when the federal government's paying 5.5%. So for that half a percent difference, is it really worth that risk?
Eh, probably not, right? So probably not worth really putting your money in there. But, what's happened in the last few months, fed has reduced interest rates. Not only that, but then because of what Trump is doing, and he's intentionally doing this, the Secretary of Treasury is intentionally doing this. This has been their plan.
They didn't expect to be so spectacularly successful in what they were doing, and they have both said this, that they did not expect that the market would react so strongly to what they did, but, in scaring the market with all these tariffs they've driven people to go to treasuries and they've driven the yield down on the treasuries which has reduced right at the start of this the short term treasuries, which is the money market funds, the yield on that has dropped to 3.7%.
Right. So we went from 4.25 to 3.7% in a few week period. Right. And it's only keeping going down. So now you have this gap between 3.7% on treasuries and 6%, well, it's now 6.5 to 7% on corporates. That's a big gap, right? So now you're like, okay, maybe I'll put 20% of my money in corporates and the rest in treasuries.
And you start dialing up that risk to get more of that reward. And so as the yield gets harder and harder to find, you start taking on more and more risk. But you don't want to take on the risk sooner than you have to, right? Because you still want to get as much free money as risk-free money as possible.
Freddie: That makes a lot of sense. And we're talking about money market funds and ETFs. So for somebody Leibel who's in retirement, how should these tools be used? Oh, in say short term savings or even income strategy, and should retirees favor one over the other or build a mix of them?
Leibel: So I think you need to build a mix of them.
You need to have a portfolio that it dials the risk up and down. And I think, let's talk in our bucket strategies, right? Those time diversification that I like to talk about, right? Where you have your spending money and that money really shouldn't move very much. And then you have your near term bucket, your 3-5 years, that's your replenishing bucket.
What are you gonna use in a few years? And then you have your long-term bucket, right? And those first two buckets, that is really your shield. That is what is designed to protect your income, right? To protect your long-term growth. That is what happens if the market stays down for two years, three years, five years, 10 years.
'Cause it's done that, right? It can do that. What are we gonna live off of while we wait for our growth money to recover? And so I think what you want to have in that spending money. That's where we take the least amount of risk possible, but we still want to get 5, 6% return in there. We can't afford to get a 2% return on that bucket because while 2% return may sound okay, it does mean that we're going backwards in our portfolio and we're spending 4 or 5%.
So we need to at least keep up with inflation. We want to beat inflation by a few percentage points. We want to get some kind of return. So we slowly dial up the risk in there, but we don't want to take too much in that second bucket. That's where we dial up more. And we would have more corporates, we would have more, even more equities in there.
And we dial it to your risk reward comfort zone. You definitely want to be dialing that. And that is an actively managed process, right? It's not like buy and hold and the growth. Go buy the S&P 500. Hold it. Don't think about it. Right. You don't need a professional to manage that.
What you want though is on those short term buckets. You wanna be slowly dialing up that risk, and that is where that active management comes in. Taking on the least amount of risk possible for the greatest return. Managing that downside, right? As the market kind of like shifts, like we just had, market just tanked 20% in what was it, a week and a half.
That is something that happens, it happens, about every 18 months every three and a half years, a 20% correction every 18 months, a 10% correction. We wanna make sure that when that downside happens, that first bucket isn't going down by 20%. It's not even going down by 10% or 5%, right?
It's going down by maybe 1%, maybe 2%, or none if we can afford it. And we can make it happen. And so that is really what we want in those buckets. We wanna dial that risk. That's what we do every day for our clients. That's what we do with YFYA, our ETF, it is specifically designed to actively manage that risk.
Freddie: So with this safe money, so to speak in time we have left, can you talk about the misconceptions or mistakes retirees make dealing with this safe money?
Leibel: Yeah, so the biggest mistake that I see people making is they either go to one extreme or another. So some will go and they'll say, well, for this low risk bucket, I'm gonna just put it in my bank and not worry about it.
When you just put it into your bank, last year was okay, you were making 3, 4%, that's okay. But now Bank of America is paying like 1.5%. CDs, you're lucky if you're getting a 3% renewal. You are leaving a lot of money on the table. And while it may feel okay, it may feel safe, well at least this money isn't, losing money, right?
You are, in reality, you're moving backwards because of inflation. And when you look at your overall spending and you're looking where your money's coming from, you need everybody to work as much as possible because if a third of your money or 10% of your money is not taking on any risk, that means the rest of your money has to take on even more risk, right?
And so the required return on your other money becomes even greater, which I guarantee you, you're not compensating, you're not taking that extra risk and that other money because your short-term money is, risk off. What you're doing is you're being happy that you're having less risk in your smaller buckets and less risk in your later buckets, right?
And then what happens is five, six years down the road, that catches up to you, and then you start looking at your bank account and you're wondering why you're running outta money in retirement, why it's not keeping up with expenses, why it's not keeping up with inflation, and it's because you didn't properly dial your risk across the board.
You operated things independently when they need to be operated holistically.
Freddie: You talk about these ETFs and money market funds on yields4u.com, right?
Leibel: On yields4u.com absolutely. We talk about these. We also, if you go through our, create a retirement plan, the wizard over there, it talks about it and always feel free to reach out more than happy to talk about it and share what our current recommendations are.
Freddie: Leibel thanks so much. We gotta leave it right there. But we've learned today that choosing the right short-term investment comes down to balancing safety, access, and income. Whether you're sticking with your CDs or exploring new options, the key to all of this is aligning each choice with your retirement goals and your retirement comfort.
