Your Best Cash Alternative

Cash is the Rodney Dangerfield of asset classes right now -- with tiny yields, it just gets no respect.

The current market offers a range of products, but not much in the way of stellar returns. Bankrate.com lists the average money market or savings account interest rate as 0.81%. My search for ways to beat that average turned up some options that are summarized below.

Savings and cash accounts
These are statement savings accounts and brokerage sweep accounts offered by banks, credit unions, brokerages, and other financial firms. Most of these accounts carry FDIC or other agency insurance. Internet and nontraditional banking institutions dominate the high yields -- if you can call these yields high.

Source: Institution websites on March 23, 2010.

Money market accounts
Money market accounts are managed funds investing in short-term debt such as commercial paper, T-bills, etc. The fund managers target a stable share value, but there is no guarantee they can do that, and the accounts are not typically insured. In the past, money market funds or accounts commonly offered higher interest rates than savings accounts, but in the current nada-point-zip environment, management expenses are eating up most of the returns. Accounts from two big mutual fund firms are summarized below.

Source: Mutual fund family websites on March 23, 2010.

Exchange-traded funds
The financial industry has rolled out ETFs, making it easy to invest in any number of asset classes. Research for this article didn't turn up any true cash account equivalents, but some very short-term bond offerings come close. A key difference between an ETF and a savings account or money market is that the principal value will fluctuate with the share price. 

At today's low interest rate, a few-cents-per-share loss could wipe out the benefits of a handful of basis points in yield. ETF investors will also need to consider that trading commissions will eat into the returns. Three ETFs that have had very little volatility in share price and that hold short maturity paper are profiled below.

Source: ETF webpages and Yahoo! Finance.
*The PIMCO fund started trading in November 2009. Range is from first day of trading.

This is not intended to be a comprehensive review of cash account options, only a representative sample of some of the types of products available. Large cash balances or the ability to tie up funds for more than a few months often open up better deals on accounts.

Money market funds have a challenge to just tread water and cover management fees with short-term rates at historical lows. Very short-term ETFs are relatively new and may be good alternatives when rates increase, but the one fund reviewed that offers enough yield to be interesting has had more than enough price variation over its four-month history to wipe out any benefit from a higher yield.

In today's market, savings accounts yields from Internet banking and nonbank banks lead the way. The rate differences between the best and worst may not be enough to fill the gas tank, but it might be worth an extra gallon or two over time.

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