Fidelity Core Account - SPAXX versus FCASH?

[greg9840]

I'm surprised I haven't seen much talk about this on this forum, since so many people are using Fidelity.  All Fidelity accounts come with a "core account", called FCASH, which is where cash sits, by default.  Fidelity offers the option to have the cash sit in a "government" money market, SPAXX, instead.  SPAXX does not look Harry Browne approved, at all, since it holds mostly "repurchase agreements" and agency securities, so this should not be considered as a place to park my all of my PP cash position.  But, for a relatively small portion of my cash that I want to keep handy, isn't SPAXX safer than FCASH?  A rep at Fidelity told me that FCASH isn't backed by anything (I guess it is only backed by Fidelity's full faith and credit).  SPAXX does not have an expense ratio of 0.42%, but it appears they are waiving almost all of that because the fund supposedly never generates negative yield.  Below are the holdings of SPAXX:

Composition by Instrument
AS OF 4/30/2013
Portfolio Weight
U.S. Treasury Bills 0.00%
U.S. Treasury Coupons 4.87%
U.S. Treasury Strips 0.00%
U.S. Treasury Inflation-Protected Securities 0.00%
Agency Fixed Rate Securities 19.21%
Agency Floating Rate Securities 10.19%
Repurchase Agreements 67.16%
Other Money Market Investments 0.00%
Net Other Assets -1.43%

[Pointedstick]

The thing is, cash is supposed to be your safe stable asset. When the whole world is crashing down around you, that's the wrong time to discover that your cash is 67% composed of "repurchase agreements" for toxic assets, bankrupt companies, now-defaulted bonds, ruined real estate, and mining rights in socialist banana republics. Besides, SPAXX is yielding, what, 0.01%? Putting aside the ER entirely, it seems like you're not really gaining anything at all by taking on all that risk compared to simply holding T-bills or shares of SHV or something. I get the convenience angle but safety is the name of this game.

[murphy_p_t]

isn't it great that fidelity and vngrd both offer free trades on US treasury debt?

[ozzy]

I have Fidelity and buy FSBIX for my cash portion (commission free).

[Ad Orientem]

I have Fidelity and buy FSBIX for my cash portion (commission free).

That's reaching a tad bit farther out on the yield curve than I would go with cash. But to each their own.

[sophie]

Fidelity's cash accounts are backed by SIPC insurance and secondarily by a Lloyd's of London policy.  Neither of those will meet the Harry Browne standard, but it's not unreasonable to keep some money in the core position for quick trades.

There is a Fidelity treasury money market paying zero interest (FDLXX) and with some nice direct access features, but it has a $25,000 minimum.  As an alternative to an ETF, you can buy T bills using the "fixed income" trading link, and sign them up for Autoroll.  You can stick with 4 week T bills for maximum liquidity, or go with 6 month/1 year T bills and construct a ladder.  Either of these will get you just enough yield to make you feel like you're accomplishing something, and it removes a fund's manager risk.  Note that (theoretically) T bills are supposed to sell in one day if you need them, just like a fund.

[greg9840]

I'm not sure how I feel about laddering a portfolio of T-bills up to a year because if rapid inflation were to occur, I could miss out on the higher interest for a full year.  I just moved almost all of my cash to FDLXX, just to keep it safe while I am pondering this.  I don't like the fact that the normal expense ratio of FDLXX is 0.42%, although the profile says they lowered the expense ratio to 0.10%.  I'm guessing they had to lower the expense ratio to 0.10% so the customers could earn their 0.01%.  Fidelity told me I would never earn negative interest/lose money if I have cash in FDLXX, so the expense ratio can never exceed the interest I am paid. 

I was also thinking about putting half of my cash in 1 month T-Bills and the other half in 3 month T-bills.  In looking at the yields, it appears I would make about .02% or .03%, instead of the .01% that FDLXX is paying.  I'm not sure if it's worth the trouble, and I do have a tiny interest rate opportunity cost risk in that if interest rates were to shoot up, I would be locked into the T-Bills for up to 90 days.  Harry Browne never talked about owning 1 to 3 month T-Bills for the cash position, I don't think, but maybe that was due to the commissions that would have been charged back then (before Fidelity and Vanguard started offering free Treasuries trading)?  I think Browne pretty much always just recommended Treasury backed money market accounts for cash.  I was also thinking about the Gabelli Treasury backed money market fund because the expense ratio is very low, but, to be honest, I have never heard of Gabelli, so that makes me too nervous to put my cash in it. 

Also, I am totally unable to wrap my mind around the BIL and SHV ETFs.  They sound good and have very low fees, but I don't understand how cash in an ETF is stable since the price of the ETF can fluctuate.  For example, what would happen if a hedge fund sold off a huge position in BIL or SHV?  Could the price plummet?  The prices seem pretty stable, but I have no idea how the prices are set and how much the prices could change in a worst case scenario.  HB said to never invest in something you don't understand, and I definitely don't understand.  I would appreciate some feedback on how BIL and SHV are supposed to be as safe as a Treasury backed money market account that always trades at $1.00 per share, no matter what, even if a hedge fund dumps a massive number of shares.

[rickb]

Also, I am totally unable to wrap my mind around the BIL and SHV ETFs.  They sound good and have very low fees, but I don't understand how cash in an ETF is stable since the price of the ETF can fluctuate.  For example, what would happen if a hedge fund sold off a huge position in BIL or SHV?  Could the price plummet?  The prices seem pretty stable, but I have no idea how the prices are set and how much the prices could change in a worst case scenario.  HB said to never invest in something you don't understand, and I definitely don't understand.  I would appreciate some feedback on how BIL and SHV are supposed to be as safe as a Treasury backed money market account that always trades at $1.00 per share, no matter what, even if a hedge fund dumps a massive number of shares.

If a hedge fund dumped a huge position in BIL or SHV the price could plummet.  However, the authorized participants can trade baskets of t-bills for shares, or vice versa, so any price dislocation relative to NAV (in either direction) creates an arbitrage opportunity.  In this hedge fund dump scenario, presumably shares would be worth less than the corresponding amount of bills, so an AP would buy shares on the open market and trade them for bills and then immediately sell the bills - thereby making money - and then continue doing this until the share price rose enough so that this was no longer a profitable trade.  It is this arbitrage opportunity (available only to the APs) that keeps the price of an ETF close to the NAV of the underlying assets.  It's indirect, but generally effective.

[sophie]

We'll never know what Harry Browne thought of the T Bill autoroll option, since it wasn't available when he was around.  I'd guess that he'd recommend FDLXX for simplicity, but would be very attracted to the added safety of a 4 week T Bill ladder either at Treasury Direct (linked to your checking account) or at a brokerage like Fidelity.  It removes fund/manager risk, gets you a better return than the money market fund can offer you, and keeps your money in a very liquid state (25% maturing every week).  Going Treasury Direct would be one step safer than Fidelity, although it would be a pain to liquidate your T bills more quickly than 1 month.

I prefer auto-roll to high-expense fund myself, and I believe Bear Bones has implemented a T bill ladder at Treasury Direct.  (BB - you still around???)