Wednesday, July 16, 2008

SIPC insurance, treasuries, and mutual funds

Harry Newton writes on his In Search of the Perfect Investment web site that:
Brokerage accounts are insured by something called the SIPC.

..., a reader, emailed me yesterday:

Harry Am I correct in figuring if I buy treasury bills in my brokerage account that money is safe (with the bills held in the account) as opposed to brokerage cash held in the brokerage money market?

I replied I didn't know. But I certainly would not make ANY assumptions today about the safety of ANY financial institution. I think the old rule of CHECK, CHECK, CHECK can now be safely modified to SPREAD, SPREAD, SPREAD.

To be clear, SIPC does *not* protect the dollar value of an investment, but simply assures that you can get your paper (stock certificate) back if there is a problem with your brokerage firm. Really, it is only insurance for the paper and the ink written on it, or the electronic equivalent (SIPC will recreate the "bits" of your electronic ownership of a "security" at another broker.)
To be crystal clear, SIPC does not protect or "insure" the market value of the covered securities. SIPC protects the number of shares or units (of stocks, bonds, or money market funds), and assures that you get back that number of shares or units, but SIPC makes no guarantees about the net asset value of each share or unit.
Also to be clear, your broker or brokerage firm or bank has no say or control over the NAV or market value of a mutual fund or even any say or control as to how a mutual fund is managed.
As far as treasuries, they are like any other security and SIPC will protect the number of units of investment (bill, note, bond), but offers *no* protection on the market value of each investment unit. Literally, all SIPC will do is assure that you get your paper (certificate or its electronic equivalent) back, independent of what the market value of that paper might be. The market value of longer-term treasury notes and bonds can fluctuate dramatically if you need to sell before maturity, but T-bills are a very safe store of dollar value as long as you hold them to maturity (4 weeks, 134 weeks, 26 weeks, or 52 weeks). They are inherently safer than a money market funds, but as a result they tend to have a significantly lower yield than the top funds. The most recent 13-week (90-day, 3-month) T-bill auction gave a yield of 1.64%. The 6-month T-bill had a yield of 2.00%.
Note: You can buy Treasuries directly from the U.S. Treasury without the need for a broker.
Personally, I am still quite comfortable keeping my cash in Fidelity money market mutual funds.
-- Jack Krupansky


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