Swelling Money-Market Funds Creates Headache for Advisors

With money-market funds and other cash-equivalent strategies now offering yields in the 5% range, savers and nervous investors finally have a comfy sleep-at-night scheme for riding out market uncertainty. 

But on the flip side, the near-record $5.6 trillion sitting in money-market funds in addition to all the money parked in cash-proxy ETFs and savings accounts, is giving financial planners fits as clients unwittingly invite opportunity risk. 

“With cash yielding around 5%, it has been much more challenging to keep clients invested in the markets,” said Madison Sharick, founder of Madi Manages Money. 

Sharick said the Federal Reserve’s 18-month campaign to fight inflation with higher interest rates has presented investors with a viable alternative to taking risks in the equity markets. 

 “I'm concerned with the opportunity cost clients face by sitting in the relative safety of cash,” she said. “Based on history, we know that cash-like investments don't outperform inflation over long periods of time.” 

Financial advisors often recommend holding up to six months’ worth of cash for emergency expenses. The higher yields across virtually all cash accounts and equivalents make it easier to get clients on board. But against the backdrop of a unique year like 2022 when both stocks and bonds finished in negative territory, the bigger risk now might be taking too little risk. 

$50K in Cash 

Alvin Carlos, financial planning and managing partner at District Capital Management, said most of his clients are holding cash reserves of around $50,000, which he’s okay with. 

But he said there are some clients “who sleep better at night knowing they have $100,000 in cash.” 

“Since the stock market drop in the last three months, we have been urging clients to deploy their cash,” he said. “A 5% cash yield is high, but they understand that they can make more in the stock market, because U.S. stocks have historically returned 10% a year on average.” 

According to a report Thursday from the Investment Company Institute, retail investors are responsible for more than $2.1 trillion of the total $5.6 trillion sitting in money-market funds. 

Cash-Equivalent ETFs 

But that cash total doesn’t include all the high-yielding savings accounts and cash-equivalent ETFs like the $37 billion SPDR Bloomberg 1-3 Month T Bill (BIL), which has seen $12 billion worth of net inflows this year, including $8.4 billion in the past month. 

“The highest yields in a decade and a half are encouraging individuals and businesses to move cash from lower-yielding bank accounts to money-market funds,” said Sumit Roy, senior ETF analyst at etf.com. 

“The regional banking crisis earlier this year also gave a boost to money-market funds, which are considered safer than uninsured bank deposits,” he added. 

Nick Rygiel, owner of Ironclad Financial, said he is keeping clients from overweighting cash by “employing risk-mitigation techniques such as protective puts or collars.” 

Downside Protection

Rygiel is using exchange-traded funds that offer downside protection while limiting upside potential, including the Innovator Equity Defined Protection ETF – 2 Yr to July 2025 (TJUL), Innovator Growth-100 Power Buffer ETF – October (NOCT), and Innovator Premium Income 10 Barrier ETF – July (JULD). 

“These approaches assist in aligning the market volatility with a client's financial objectives, risk tolerance and risk capacity, thus retaining their investment interest in the markets,” Rygiel said. 

Corey Voorman, president and founder of Voorman Investment Counsel, said the challenge of pitting equity market risk against a predictable 5% return is real and rare. 

“The last time investors have seen short-duration U.S. government bond yields above 5% was in June of 2006,” he said. “The recent rise in yields should make equity investors more selective as they seek to identify companies that will provide a return that may exceed the risk-free rate.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter