Fidelity Customers: Get the Inside Scoop on FDRXX & Your Other Cash Options
FDRXX executive summary
- FDRXX is a money market fund operated by Fidelity that invests exclusively in government-backed securities like T-bills, TIPS, and Repos.
- Fidelity offers is as one option to use as a cash core position.
- You can change what security is used as your cash management core position, but not every option is available for every type of account.
- While this is considered an extremely safe investment, it is not FDIC-insured, like some of Fidelity’s other cash-management options. You can technically lose this investment, though we think that’s extremely unlikely.
FDRXX: what exactly is it?
You might be seeing a position in one or more of your Fidelity accounts that looks something like this …
… and wondering what it is. Each Fidelity account needs to have a ‘core position,’ which is the position Fidelity uses to “process cash transactions and to hold uninvested cash.”
Fundamentally, account holders have three types of options for their core position:
1. Hold in an equivalent to a savings account: This is the “FDIC” option, which insures cash deposits up to $250K. This works similarly to a savings account at a regular bank. The money is not invested and the account holder will be paid a small amount of interest for keeping their funds in this position.
2. Hold as a credit to the account holder: this is the FCASH option. This is not FDIC-insured but is simply noted as a credit. Fidelity is not required to pay interest on this balance to you, but historically they pay a very small amount.
3. Invest in a money-market fund: this is FDRXX and several other options like SPAXX or FZFXX. The cash is invested into a fund, which works just like other funds, the investor receives a return, but the money is at risk. Typically, ‘money-market’ funds only invest in very low-risk securities and earn a small return.
FDRXX: performance historically low, recent uptick in ’22-23
We have to consider the primary purpose of most money market funds is first to preserve capital. That’s why they tend to invest strictly in low-risk securities, like treasuries. Some money market funds will attempt a higher return and invest in higher-risk instruments, but FDRXX goes the ultra-low-risk route and stick to only US Government backed securities.
For most of the past ~10 years, since the financial crisis, the return on FDRXX has been close to zero. But recently its annualized rate of return is hovering just over ~4%. Its lifetime (since 1979!) annual return is 4.35% which is higher than we were expecting to find. While that’s not too bad for an investment that’s about as close to risk-free as you can get, we think the averages hide what’s really going on.
Is 4.35% average annual lifetime return actually attractive?
We think probably not. While we think this fund is a great option for holding your cash short-term, it’s still not a substitute for a medium or long-term investment. Over the long term, FDRXX only beats inflation by about ~1% (annualized inflation since 1979 has been about ~3.25%). Obviously, an investor won’t grow much wealth by just beating inflation by a percent.
The average return looks like an attractive 4.35%, because FDRXX tends to perform better during high inflationary times. This is likely because during high inflation, the Fed will raise interest rates to try to bring inflation down. While we couldn’t find performance data on FDRXX all the way back to 1979, we can use the 3-month treasury rate as a good proxy. Doing so, we see the clear link to inflation in the chart below. So while there are times when FDRXX has had a seemingly high rate of return, it’s likely not beating inflation, or if it is not by much. So FDRXX investors are not making much in real dollars (on average about 1% per year, as noted before).
Focus on: what other cash management options does Fidelity offer?
They offer a dizzying array of 31 money market options (see the chart below for the full list).
It’s made more confusing by the fact that not all options are available in every account type. Additionally, most of these funds are not available to use as your Fidelity account’s core cash position. But you could manually invest (and liquidate) in them, if so chose, thereby using them as your cash management fund. What’s more, some of these funds have additional restrictions, like a minimum investment of $100K. Certain funds are only offered in taxable accounts, while others are only offered in retirement accounts. It’s a lot to try to sort through.
All that said, the main options to use as a core position seem to be FDRXX, SPAXX, and FZFXX (apart from the non-invested options described above of FDIC and FCASH). While a full comparison of these three is beyond the scope of this article, they are all very similar.
Note: we couldn’t squeeze the following 3 into the list below:
FDRXX: basic stats
Some of the stats we find interesting are that this has net assets of over $200B, so it’s clearly popular with Fidelity investors. We also noted that FDRXX tends to invest heavily in very short-term instruments, which makes sense of course for a money market fund meant to provide very high liquidity. It’s not shown below but over 90% of the instruments held when we recently checked were maturing within 7 days.
Bottom line: are we buying?
Yes! While we believe in keeping as much money invested as we can (e.g., not trying to time the market), we obviously have cash flow needs, and FDRXX is indeed one of the funds we use for our core cash position in one of our Fidelity accounts.
Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School.
After seeing the lack of personal finance education for regular people, Cody started the website with the mission to provide everyone access to information that will help them achieve their financial goals.
Cody approaches personal finance from a maximalist perspective, shunning typical advice around simply not buying a cup of coffee instead of more effective methods like investing in yourself to quickly grow your income.
He believes in saving money and investing for the future, but he also knows that you need to enjoy life today. That’s why Cody approaches money with a sense of humor and a positive attitude. He knows that if you’re not having fun while you’re growing your wealth, then what’s the point?
Cody approaches life with the same gusto that he brings to personal finance. He loves to travel and experience new cultures, and he is an avid reader and learner. He also enjoys playing sports (especially tennis) and spending time with his family and friends.