Original Article

Journal of Financial Services Research

, Volume 27, Issue 1, pp 51-76

First online:

Money Funds or Markets? Valuing Intermediary Services

  • G. D. KoppenhaverAffiliated withDepartment of Finance, Iowa State University
  • , Travis R. A. SappAffiliated withDepartment of Finance, Iowa State University Email author 

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Recent market developments, such as on-line trading of Treasury securities and the reduction of the minimum Treasury bill denomination to $1,000, facilitate creation of a viable alternative to U.S. Treasury money funds for investors. Comparison of a direct investment in Treasury bills to U.S. Treasury money funds shows that money fund intermediary services such as check writing, telephone exchange privileges, payroll and automatic transfers, retirement plans, and minimum initial and subsequent purchases are worth an estimated 43 basis points per year, and investors pay an additional 11 basis points for active portfolio management. An analysis of fund net cash flows shows evidence consistent with arbitrage activity between money funds and the direct investment in Treasury bills, especially for investors with few ties to the money fund manager.

Key words

Money market mutual funds intermediary services liquidity services direct investment in Treasury bills