The brawl between platform behemoths like Charles Schwab, Fidelity Investments and others with zero-fee commissions on stock and exchange-traded fund trades is just heating up. In many ways, ETFs and the fight for assets under management largely sparked this price war. Given that, could ETFs play a role in the next battle?

It appears the next fight for client assets is taking place within brokerage accounts that automatically sweep client assets into money market funds. The chief problem is that brokerage firms, in some cases, are providing deliberately depressed yields to boost their bottom lines.

Yield Discrepancies Galore
Default sweep accounts containing money market funds that are offered by E*Trade, Schwab and TD Ameritrade yielded a puny 0.01% to 0.12%, though October 9. Meanwhile, rates for top yielding retail money market funds hovered between 1.97% and 2.02%, according to Crane Data, a Westboro, Mass.-based research firm that tracks money market yields. The discrepancy between stingy brokerage money market yields versus more generous retail money market funds is significant. What’s contributing to the problem?

Depressed yields on U.S. money market funds are a microcosm of a bigger and broader decline in global bond yields. The yield on 10-year government debt in Australia, Canada and the United Kingdom hovers between 0.63% and 1.51%. Even worse, yields on 10-year government debt have turned negative in Germany, Japan, Switzerland and elsewhere.

Now that ETFs can be bought and sold without a trading commission on most large brokerage platforms, using short-term bond ETFs may be one way for advisors to help their clients earn more yield on their cash. Let’s analyze some alternatives to low-yielding money market funds.

iShares iBonds Dec 2020 Term Corp ETF (IBDL)
The fund holds investment-grade corporate bonds that mature after December 31, 2019 but before December 16, 2020. It’s a good alternative for clients who want credit quality and yield with rock-bottom cost. If clients hold the fund until IBDL's December 2020 maturity date, the fund is designed to return their full principal, minus the 0.10% annual expense ratio. IBDL’s 30-day SEC yield is 2.10%.

Schwab Short-Term U.S. Treasury ETF (SCHO)
This fund follows the Bloomberg Barclays US Treasury 1-3 Year Index and is another attractive alternative to low yielding money market funds. SCHO’s annual expense ratio is just 0.06% and the 30-day SEC yield is 1.63%.

Vanguard Short-Term Bond ETF (BSV)
It’s hard to have a conversation about better yielding and lower cost alternatives to brokerage money markets without mentioning Vanguard. BSV is linked to the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index. Some of BSV’s holdings have maturities up to five years, which might be longer than shorter-term cash-oriented investors want. But in exchange for the longer durations, BSV has a slightly higher SEC 30-day yield of 1.80%. And its annual fee of just 0.07% is hard to beat.

The main benefit of using short-term bond ETFs as an alternative to brokerage money market funds is better yields. Moreover, most short-term bond ETFs charge annual expense ratios less than 0.15%, which allows clients to retain most of their yield.

Keep in mind that money market funds aim to keep a stable net asset value of $1.00. But like short-term bond ETFs, they do not offer FDIC insurance or principal protection.

While price fluctuations of a short-term bond ETF may be slightly more compared to money market mutual funds, those movements are likely to be small. Also, any meaningful upswing in interest rates will have a muted effect because short-term bond ETFs are less impacted by rising rates versus bond funds with longer durations of five or 10 years.

Now that brokerage commissions for trading ETFs have been reduced to zero at many firms, investing in short-term bond ETFs instead of low-yielding brokerage money market funds makes all the more sense. 

Disclosure: The author has a position in the Schwab Short-Term U.S. Treasury ETF (SCHO).

Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of “Habits Of The Investing Greats.”