Along with stocks and bonds, cash and cash-like assets form a critical part of a diversified investment portfolio. As the “asset of last resort,” cash is one of the few assets to remain truly safe and risk free during the worst of market crashes. While it can be eroded by inflation, cash is as riskless as assets get.
The downside to holding a high cash allocation is opportunity cost. While investors can ensure safety of principal, they won’t earn much of a return holding just cash. The solution here is money market funds, which can provide a high degree of stability while earning some steady income. These funds can be easily purchased in most brokerage accounts like any other mutual fund.
“Money market mutual funds are great investments for short-term, conservative investors,” says Nafis Smith, principal and head of taxable money markets at Vanguard. “This is because they typically invest in very liquid securities with the objective of preserving your capital while also providing income at prevailing market rates.”
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The holdings in money market funds tend to be high-quality, short-term debt securities, such as U.S. Treasury bonds, certificates of deposit, repurchase agreements and commercial paper. These assets have both a low risk of default and low interest rate sensitivity, which makes them suitable as short-term, low-risk investments. All of these securities tend to be very liquid, meaning they can be bought and sold easily.
“Money market funds can be a great way to save for short-term goals, like buying a car, a down payment or building your emergency savings,” says Sophoan Prak, a certified financial planner and financial advisor at Vanguard. “Generally, if you have a planned expense within one year, a money market fund can be a good investment option for it.”
For stability, money market funds target a constant net asset value, or NAV, per share of $1, and pay out consistent monthly distributions in the form of interest income. However, it is important to note that while money market funds are low risk, they are not entirely free of risk.
“Investors should understand the share price of a money market fund can dip below its NAV per share of $1 and have historically done so a few times during extremely volatile markets,” says Smith. When this occurs, a money market fund is said to have “broken the buck.”
That being said, regulations put in place after the 2008 financial crisis have made money market funds much safer. “Industry regulations, such as additional SEC money market reforms in 2016, have helped money market funds better maintain a stable NAV,” Prak says.
With U.S. Federal Reserve interest rate hikes lifting money market yields higher, here’s a list of the best money market funds to buy in 2023:
| Money Market Fund | Expense Ratio | 7-Day SEC Yield |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | 5% |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.15% | 3.3% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.09% | 5% |
| Schwab Value Advantage Money Fund Investor Shares (SWVXX) | 0.34% | 4.9% |
| Fidelity Money Market Fund (SPRXX) | 0.42% | 4.8% |
| Fidelity Government Money Market Fund (SPAXX) | 0.42% | 4.8% |
| JPMorgan Liquid Assets Money Market Fund (MJLXX) | 0.59% | 4.8% |
Vanguard Federal Money Market Fund (VMFXX)
“I like VMFXX for its low fees versus many other money market funds that not only have lower yields, but also higher expense ratios,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. Case in point, VMFXX currently charges a 0.11% expense ratio, or $11 annually on a $10,000 investment, and has a 7-day SEC yield of 5%. With interest rates at historical highs, VMFXX is now paying competitive yields.
“VMFXX invests mainly in high-quality and short-term government securities,” says Prak. This includes repurchase agreements, which make up around 62% of the fund, followed by various short-term U.S. government obligations that comprise the remainder. Investors looking for consistent income may like VMFXX due to its monthly distribution schedule.
Vanguard Municipal Money Market Fund (VMSXX)
“One of the benefits of investing in VMSXX is receiving federally tax-exempt interest income,” Prak says. For investors with a higher income tax bracket, VMSXX can be a more efficient holding in a taxable brokerage account compared to VMFXX. This is due to the fund’s holdings, which are primarily comprised of short-term, tax-exempt fixed-income securities issued by municipal agencies.
VMSXX currently charges a 0.15% expense ratio while paying out a 7-day SEC yield of 3.3%. While this is lower than VMFXX, the after-tax net return can be much better, especially for high-income-bracket investors. From its inception in June 1980 to the end of April 2023, VMSXX has returned an annualized 2.7% with distributions reinvested.
Vanguard Treasury Money Market Fund (VUSXX)
For even greater safety, investors can consider VUSXX, which invests at least 99.5% of its assets in U.S. Treasury bills, cash or repurchase agreements collateralized by Treasury bills. Short of a U.S. government default, U.S. Treasury bills remain among the most low-risk assets available to investors thanks to their strong credit rating and short maturity, which reduces interest rate risk.
Like most money market funds, the interest income paid on VUSXX moves in lockstep with prevailing U.S. interest rates. Thanks to rising rates, this fund is currently spitting out a 7-day SEC yield of 5%, against which it charges a 0.09% expense ratio. From its inception in December 1992 to the end of April, VUSXX has returned an average of 2.3% a year with distributions reinvested.
[READ: ETF vs Mutual Fund: How to Choose for Your Investing Strategy]
Schwab Value Advantage Money Fund Investor Shares (SWVXX)
Investors looking for an actively managed money market fund with the ability to hold foreign issues can consider SWVXX. Unlike the previous option, this fund also holds high-quality money market instruments from international entities, which include Canadian, Australian and New Zealand banks. SWVXX is categorized as a “prime money market” fund, meaning that it also holds corporate debt securities.
Currently, SWVXX is paying out a seven-day SEC yield of 4.9%. Due to the higher cost of active management, this fund charges a greater net expense ratio of 0.34%, which may not be desirable for investors seeking the most cost-effective option. From its inception in April 1992 to the end of April, SWVXX has returned an annualized 2.4%.
Fidelity Money Market Fund (SPRXX)
Investors who use Fidelity as their broker may prefer SPRXX, which like many Fidelity funds charges no transaction fees, carries no minimum required investment and has no sales loads or 12b-1 fees. This fund has been around since January 1989, and as of the end of April has returned an annualized 2.9% with distributions reinvested. Currently, SPRXX charges a 0.42% expense ratio against a seven-day SEC yield of 4.8%.
Otherwise, SPRXX is like most other money market funds, with a stable NAV per share of $1 and holding a portfolio of certificates of deposit, or CDs, Treasury repurchase agreements, commercial paper and government agency securities. SPRXX has the ability to invest more than 25% of its assets in securities issued by companies from the financial sector and can also hold foreign money market instruments.
Fidelity Government Money Market Fund (SPAXX)
Investors who wish to avoid commercial paper from corporations can opt for SPAXX, which only holds government-issued money market instruments. Currently, the fund’s portfolio is largely comprised of U.S. government repurchase agreements collateralized by cash, followed by agency-issued floating-rate securities. As with all money market funds, SPAXX targets a stable NAV-per-share price of $1.
Compared to SPRXX, SPAXX carries a lower risk of breaking the buck due to the higher quality of government-issued securities. Since the fund’s inception in February 1990, SPAXX has returned an annualized 2.6%. The fund also charges a 0.42% expense ratio.
JPMorgan Liquid Assets Money Market Fund (MJLXX)
Investors who don’t mind holding a higher proportion of corporate notes and commercial paper in exchange for higher yields can consider MJLXX. This fund is concentrated in holdings from the financial services industry, particularly asset-backed commercial paper. MJLXX also holds the usual CDs and bank obligations.
Currently, MJLXX is paying out a seven-day SEC yield of 4.8%, against which it charges a 0.59% net expense ratio. Since its inception in January 1987, the fund has returned an annualized 2.9%. So far, MJLXX has accrued assets under management of around $43.4 billion. Investors may find this money market fund fairly accessible due to its minimum required investment of $1,000.
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7 Best Money Market Funds for 2023 originally appeared on usnews.com
Update 05/31/23: This story was published at an earlier date and has been updated with new information.
