I understand that businesses need to make money, but I think that all the cards should be on the table as far as one of the biggest trade-offs investors are making in return for getting commission free trading with Schwab. People who trade stocks often might buy stocks more now that trading is free, but they also might sell them more, therefore leaving funds sitting in cash for a longer amount of time. Fidelity, which has yet to jump on the commission free bandwagon offers money market mutual funds as sweep accounts, so your uninvested cash will earn 1.6%-1.8% (as of October 2019) while it is sitting on the cash sweep account. Schwab on the other hand does not offer money market sweep accounts and rather you get a paltry 0.12% yielding FDIC insured sweep account. Do a quick google search and you will see how many people are hoarding cash and it starts to make sense how Interest Revenue is one of Schwab’s biggest revenue drivers and therefore part of the reason they are able to offer commission free trades.
Rather than let your money sit in cash, move it into Schwab’s prime or federal money market funds (SWVXX or SNVXX), or ultra short-term ETFs (i.e., “cash management ETFs”) like BIL, ICSH, or JPST. Schwab’s money market funds actually pay a similar or slightly higher yield than the comparable Fidelity mutual fund at the moment. Vanguard still wins in this department though by offering the highest yielding money market funds which can also serve as sweep accounts.
I don’t keep much cash in my checking account and none in my brokerage accounts and rather I use the ETF ICSH (2.3% SEC yield as of October 2019) as my short to intermediate term savings account. If you need to sell one of these ETFs or a money market fund to buy stocks, you will have to watch out for timing and free riding rules, but it shouldn’t be a huge problem.
Sorry if this has already been brought up….I understand this won’t affect many people who constantly stay invested, and even still, it only has a small effect on your portfolio, but I figured I’d make a post about it just in case. I also don’t mean to bash Schwab…but you have to acknowledge that they are knowingly and needlessly adding a step between your sweep account and a higher yielding money market fund for the purpose of higher revenue. Yes, ultimately it falls on the individual to handle their investments as needed, but there’s no way Schwab is really doing what’s in the best interest of it’s customers even though they are being praised for “democratized investing” for their move to commission free trading. Fidelity has a history of paying high interest on it’s sweep accounts and they have constantly been mentioning it’s higher yielding default money market sweep accounts but I’m afraid it’s falling on deaf ears…doesn’t really have the same ring as “commission free stock trading”.
TLDR; Schwab is making money on you by pocketing the spread between the rate on brokerage sweep accounts and market rates as part of a trade-off for commission free trading. This amounts to about $160/yr in lost interest for every $10,000 you leave sitting in cash. Move your cash into a money market fund or cash management ETF instead.
Other options are BIL, ICSH, JPST
Disclaimer: Consult your financial professional before making any investment decision.