Key Takeaways:
Retail investors are holding more than $3 trillion in money-market funds near a record high, and wealth managers are racing to convince them to put that cash to work.
Retail money-market fund assets have climbed above $3 trillion, hovering near a record, as wealth managers from JPMorgan Chase to Charles Schwab push clients to redeploy cash yielding 3.49% on average — barely matching inflation. The figure, tracked by the Investment Company Institute, excludes the trillions of institutional dollars also parked in money-market funds.
"People have forgotten the important diversification benefit that comes with duration," said David Royal, chief financial and investment officer at Thrivent.
Assets flooded into money-market funds in 2022 when the Federal Reserve ended its near-zero rate policy and yields rose above 5%. Rates have since fallen, but the funds have kept their appeal. Advisers are pitching corporate bonds, municipal bonds, buffer exchange-traded funds and private credit as alternatives, arguing that cash yields won't keep pace with inflation.
The $3 trillion pile represents dry powder that could flow into fixed income or equities if rates keep falling, or keep equity markets under pressure if retail participation stays muted.
Buying longer-duration bonds lets investors lock in current yields and protect against future rate drops, whereas money-market funds, high-yield savings accounts and certificates of deposit are likely to cut their yields along with going rates. Royal recommends building a ladder of investment-grade corporate bonds with staggered maturities to secure historically high yields. A flood of new issuance from hyperscalers funding the artificial-intelligence build-out has pushed up those yields, though some worry about the risks to longer-duration bonds.
Royal also favors high-quality municipal-bond funds, which yield around 4%, are typically exempt from federal income taxes and can also be exempt from state taxes. States are generally required to balance budgets, making them an attractive option for investors concerned about owning U.S. Treasury bonds because of the country's widening deficit, he said.
Todd Stankiewicz, chief investment officer of wealth manager Sykon Capital, said he devotes significant time to getting clients to consider alternatives to cash during lackluster bond performance. "If you're a wealth manager, how do you tell someone who is 65 years old to go all equities?" he said.
Stankiewicz has recommended buffer ETFs, which use options strategies to protect against market downside but cap the upside an investor can earn. Innovator Capital Management's August offering carries an 8.37% cap on upside with 100% downside protection, according to its website. Such funds are more expensive than a typical ETF — 0.79% to 0.89% — but Stankiewicz argues they are cheaper than buying a structured note from a bank. He acknowledged that if the stock market underperforms a money-market fund's yield, investors would have been better off staying put.
Don Ross, a retired airline pilot who turned 75, keeps 85% of his portfolio in stocks and the rest in a money-market fund yielding 3.62%. He studied historical bear markets and concluded they typically don't last longer than three years, so he holds enough cash to get through that period and sells stocks to replenish it. Financial planners have suggested bond funds, but to Ross "there couldn't be a worse stream of income." He notes the 10-year annualized return on Vanguard's total bond market ETF is just over 1%.
Ross recently started working with a new financial adviser who asked if he was interested in private credit. He asked her to stick to estate planning and leave the investing to him. "When I look at somebody saying, 'you need to get back into the market,' the first thing I'm asking is: Why are they saying that?" he said.
The record cash hoard gives wealth managers a large pool to draw from as they seek to prove their worth and earn higher fees. If they succeed in moving cash into longer-duration bonds or private credit, that could support fixed-income markets and corporate debt issuance. If investors keep hoarding, the muted retail participation could keep equity markets under pressure even as institutional money drives gains.
The last time money-market yields sat near inflation with rates expected to fall, investors who stayed in cash saw their real returns erode as the Fed cut. With inflation running at 3.4% annually and the Fed's next policy decision approaching, the gap between cash yields and the cost of waiting is narrowing — a dynamic that could push more of the $3 trillion into risk assets by year-end.
This article is for informational purposes only and does not constitute investment advice.
