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Back in the bad ol' days when the sluggish economy
led to money market fund yields that were flirting with zero, some
funds waived part or all of their expense fee to ensure that investors
would garner at least some return. Now that the economy is flourishing
enough for yields to rise, expense ratios are going up too.
"Many of the waivers that were implemented were
the result of a potentially negative yield -- which isn't possible,
but the fees would have chewed up the effective return down to nothing,
so they reimbursed at least back to the zero level, if not above,"
says Jeff Keil, vice president of Global Fiduciary Review at Lipper,
a mutual fund research company.
"It was a temporary phenomenon by some funds
to keep from going underwater. I would guess a sizeable portion
will reinstate their fees to a point. Some may not reinstate the
entire fee; they may see this as an opportunity to gain a shade
more yield than their competitors."
David Bachert, a spokesman for AIM Investments, says they started
reinstating fees as soon as the Fed began hiking short-term rates.
"AIM began incrementally reinstating waived fees
and expenses when the Federal Reserve Open Market Committee (FOMC)
raised the federal funds target rate from 1 percent to 1.25 percent.
AIM intends to carefully monitor the FOMC's actions and corresponding
market conditions in determining the ongoing use of this policy."
While quite a few funds across the board waived fees,
Peter Crane, of IMoneyNet, says it was most prevalent among those
charging expense ratios of 1 percent or better, which he estimates
to be about 5 percent of money funds.
Experts say with all other things being pretty much
equal, when selecting a fund, the lower the fees the better.
"These funds are designed primarily for short-term
investors," says James McDonald, manager of taxable money market
funds at T. Rowe Price. "You want liquidity and safety of principal.
It's a cliché, but you want to put a dollar in and be sure
to get a dollar out. With regulations the way they are, the funds
have to maintain very high credit quality. Over the years, money
funds have become a generic product and it's pretty hard to differentiate
yourself other than to establish a very good long-term track record."
The problem is that too many people don't pay much
attention to the expense ratio, which is what it costs to run the
fund annually. There may be other charges -- brokerage or transaction
costs -- that also whittle away at your overall return.
Vanguard, known for its low fees, charges an expense
ratio of 0.30 percent on three of its money market funds and only
0.13 percent on its Admiral Treasury Money Market fund. The average
expense ratio for a taxable retail money market fund, according
to Lipper, is 0.73 percent.
"If Vanguard can run a money fund for the cost
that they run it -- you do incur expenses. But does it need to be
1 percent or more? Probably not," says Reuben Gregg Brewer,
manager of Value Line's mutual fund research.
If you don't keep a lot of money in a money fund,
or if you use it as a temporary parking place while you decide how
to reinvest the money, it may not matter to you if the expense ratio
is a bit high. But if you use a money fund as a longer-term investment
vehicle for an emergency fund or a future purchase, it pays to shop
around and trim expenses as much as possible.
For some help in selecting a money market fund, check
Bankrate's listings of the 10 highest-yielding taxable
money market funds and the 10 highest-yielding nontaxable
money market funds.
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