When considering where to park cash short term cash for clients, two popular options stand out: money market funds and ultra-short-duration Treasury ETFs. Both offer investors a relatively safe way to earn interest while retaining liquidity, but there are differences worth noting.
Let’s compare the key features of prominent money market and ultra-short-duration Treasury ETFs. Along the way, I’ll highlight costs, yield, volatility and tax efficiency to help you decide the best fit for client cash management needs.
1. Cost
- Money market funds have expense ratios that average 0.22% while some can be as low as 0.11%. They may or may not have transaction fees depending on your custodial relationship. Some custodians do not charge fees on their own products while others have preferred providers.
- Ultra-short Treasury ETFs have expenses ranging from 0.03% to 0.25%, making them slightly more cost-effective than most money market funds. However, you may incur brokerage fees when buying or selling shares.
2. Yield
- Money market funds generate yields tied to short-term government securities and repurchase agreements. Recent yields for these funds have hovered in the 4%-5% range, though they fluctuate with changes in the Federal Reserve rate. A lower expense ratio may result in a slight edge for one product over another.
- Ultra-short Treasury ETFs often offer comparable or slightly higher yields than money market funds because they hold only Treasury securities, which can benefit more directly from rising short-term rates. Recent yields have been in the 4.5%-5.5% range, depending on market conditions.
3. Volatility
- Money market funds prioritize maintaining a stable $1 net asset value (NAV), which means minimal volatility. While breaking the $1 NAV is extremely rare, these funds are designed to preserve capital above all else.
- Ultra-short Treasury ETFs experience slight daily NAV fluctuations, reflecting changes in Treasury bill prices. While these movements are minor compared to longer-duration bond funds, they can slightly affect your principal over the short term. For clients who value absolute stability, this could be a consideration.
4. Tax Efficiency
One significant advantage of Treasury-focused investments is their tax efficiency.
- Treasuries: Interest income from Treasury securities is exempt from state and local taxes, which can be a meaningful benefit for clients in high-tax states. This makes Ultra-Short Treasury ETFs particularly attractive for tax-conscious investors. However, the income remains subject to federal taxes.
- Money Market Funds: While government-focused money market funds may hold Treasury securities, they often include repurchase agreements and other instruments that do not offer the same tax benefits as pure Treasury ETFs. As a result, a portion of their income may be subject to state and local taxes. Most will provide a breakdown of income that qualifies for state and local tax exemption, but it’s usually less than 100%.
Which Option is Right for Your Clients?
Choose a Money Market Fund if:
- Clients prioritize absolute NAV stability and simple cash management.
- Clients want quick, cost-free access to funds for short-term liquidity.
- Tax efficiency is not the client’s primary concern.
Choose an Ultra-Short Treasury ETF if:
- Clients are looking for a fully state- and local-tax-exempt investment for higher after-tax returns.
- Clients are comfortable with minimal NAV fluctuations for potentially higher yields.
- Clients want pure Treasury exposure in a low-cost ETF structure.
The Bottom Line
By considering costs, yields, volatility and tax implications, you can determine the best place to park client cash while maximizing their financial goals. Both money market funds and ultra-short Treasury ETFs offer low-risk, highly liquid options — each tailored to slightly different needs. For tax-sensitive investors, Treasury ETFs may offer an edge, while money market funds remain a reliable choice for simplicity and stability.
Stu Caplan is the Senior Wealth Strategist at Members’ Wealth, LLC, an RIA based in Media, PA. The majority of his 20+ year career has been spent in private wealth via family offices and RIAs advising HNW and UHNW clients.
