Making the Move: Vanguard Money Market to ING Direct
I decided today that I wanted to fully protect my cash funds and as a result have decided to move them from my Vanguard prime money market account to my online ING Direct savings account. This is not a reflection on Vanguard, because it is the best fund manager in the industry, it is more a risk management move on my part due to all the financial market and institutional turmoil Why is moving to an online savings account better? Well, first money market accounts at Vanguard, Fidelity and other large cap institutions are for the most part not FDIC insured and in these bizarre financial times even the most well know institutions can collapse and leave depositors with pennies in the dollar. Secondly, and as importantly from an investments perspective the yields on money market accounts have dropped so low because of tightening credit that Vanguard's money market fund (an industry leader) is now only paying a 2.25% APY (was 3.5% just a few months ago), whereas at ING Direct (see review) I can get 3% and even more at HSBC. So even taking out the FDIC insurance argument, as a straight investment decision on-line savings accounts are a better investment than most money market funds at the current time.
The following is the official website memo from Vanguard to its clients regarding money market accounts. It is the last few lines (highlighted) and the ongoing financial crisis that prompted me to make this move.The recent bankruptcy filing by Lehman Brothers Holdings Inc. and widespread turbulence in the financial markets have prompted a number of questions about the impact on Vanguard funds, including money market funds. Vanguard is confident in the stability of its money market funds, all of which are managed with the objective of maintaining a stable net asset value of $1 a share. Vanguard continues to manage its money market funds very conservatively and with extreme prudence, focusing on high quality, short-term money market instruments. All of the investments in our money market funds are closely examined by our Fixed Income Group's highly skilled and experienced credit analysts [Editor : I remember Lehman and Merrill having these highly skilled analysts as well!]. Analysts assess the quality of each underlying issuer through in-depth credit analysis and do not rely on agency credit ratings.
Our largest money market fund is Vanguard Prime Money Market Fund, [I am invested in this money market fund] which currently holds more than half of its assets in U.S. Treasury and federal agency securities [Editor: Yet is still has 14% in commercial paper which could be at risk if the credit crisis spreads further]. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.
Notes :
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. [Editor: This is the line that worried me the most] . Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investments are subject to risks. [Editor: I want to avoid as much risk as possible and FDIC insured accounts go a long way to that] 
There is no need to panic and pull your funds out at this very minute. As the table on the left from a recent NY Times article shows, most of the larger and well known market funds are well capitalized and have not had significant redemptions. However, I would urge you to look at your money market accounts and take some prudent risk management actions. If you have a significant amount of money in one of these non-FDIC insured money market funds consider moving some part to a FDIC protected on-line savings account (see recommendations) where your funds are insured (up to $100,000) and are currently getting a better return. If you are worried about your money market funds check your managers website communication or give them a call. As always, do your own research before making any decision.
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September 19, 2008 11:24 AM
You could also move to their Treasury Money Market fund, which is arguably even safer than an FDIC-insured savings account even though it's technically not FDIC insured.
September 19, 2008 11:28 AM
Kyle - I thought about that. But the yield their is getting far too low and with all the money the governemnt is printing, the risk averse nature of investors and bailout funds, the yield on treasurys is too low. It is currently around 1.64% and I can get 3% at ING which is also FDIC insured, so seems like a good move now. It only takes a few clicks online to make the move happen, so did it this morning. I can always move back when yields improve.
September 19, 2008 12:10 PM
Keep in mind that many brokers have government (Treasury + agency asset) and Treasury only money market funds. You can probably beat those yields with a high yield FDIC insured account, though. Also, fund managers that have significant capital stand to lose a lot of goodwill if they let their funds break the buck. I had a conversation with a Fidelity rep yesterday, and while he obviously (legally) could not promise/guaranty no loss on a Fidelty MMF, he made the point that Fidelity has a lot of cash (it's private, so that's hard to check), and the brand would be severely damaged if they didn't prop up an MMF with their own money to prevent it from breaking the buck. Also, as you implied in your article, some brokerages have FDIC accounts, like Fidelity and Schwab.
September 19, 2008 5:48 PM
They're not FDIC insured but they are SIPC insured which has supposedly shown to be safer. Since 2006 only 2 SIPC insured broker sort of things have gone under and one was due to embezzlement/fraud.
I'm deciding if I'm going to transfer my Money Market to Vanguard out of Wachovia myself.
September 21, 2008 6:25 PM
From the NYTimes on Sept. 19 - "The Treasury Department announced that, at least temporarily, it would guarantee money market funds against losses up to $50 billion."
It looks like they are trying to avoid people making the same move you did.
September 22, 2008 2:04 PM
Anon - Great comment and some good advice there.
N - SIPC coverage definitely isn’t as nice as FDIC insurance. Not only do you have to prove what the broker owes me and submit claim form, but it may take 1 to 3 months to get stock certificates back. In the meantime, you won’t be able to sell them. While it’s nice to know that you will be covered, reading all this doesn’t make me want to stick with a brokerage company that is still entangled with unknown liabilities from subprime debt. FDIC, available at bank accounts, insurance is much cleaner.
see my money. Yep saw that artile and commented on it in a follow up post. I think Vanguard, Fidelity and other large MM funds will be fine. The problem is their yields are getting so low that online savings accounts are simply a better investment at the current time. If rates change I can always move my money back.
January 9, 2009 10:48 AM
Long time user of ING for liquid holdings, I dropped a chunk on their 4.25% 12-month CD before the rates dropped. Ahh, that felt good.
Sadly, none of it beats inflation. But it does beat the benchmark.
February 26, 2009 4:10 PM
Any comments on simply buying up another currency at this time and sitting on it for a few years?
I keep thinking of that due to the monopoly money entering the markets.
What currencies still use the Gold Standard? Would that be something to consider?
Thanks,
Dasher