“Cash is king,” or so the saying goes. When markets crash, it is cash and cash-like assets that investors flee toward. While the most paranoid of savers may stash cash under their mattresses, the majority will hold them in federally insured options, such as high-yield savings accounts and certificates of deposit, or CDs.
In a brokerage account, investors can keep their cash safe while earning a competitive yield by investing in money market funds. “Money market funds invest in very liquid, short-term securities with the objective of preserving your capital, while also providing income at prevailing market rates,” says Nafis Smith, principal and head of taxable money markets at Vanguard.
Compared to CDs, money market funds provide much greater flexibility. “What’s wonderful about these funds is they are completely liquid, meaning there are no lock-in requirements or penalties,” says Vicki Eagleson Arndt, principal and founder of Eagleson Arndt Financial Advisors. Coupled with this liquidity is income potential that currently rivals the rates on CDs.
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Indeed, the income of money market funds has become significantly more attractive in 2023 thanks to a year of rising interest rates. “Money market rates surpassed the 4.5% mark in February 2023, whereas they were close to 0% at the start of 2022,” Smith says. “For investors, it’s like you’re getting paid to be patient while the Fed works toward taming inflation.”
Investors who prioritize the safety of principal and minimizing volatility may prefer money market funds, which are designed to maintain a stable net asset value, or NAV, at all times. “The risk associated with money funds is very low, given that the (Securities and Exchange Commission) mandates that only securities with high credit quality and shorter maturities are eligible holdings,” Smith says.
Unlike bond funds, money market funds do not lose value when interest rates rise. “These instruments have less than a 13-month maturity with a weighted average maturity of less than 60 days, so their short-term nature results in little volatility and risk of loss,” Arndt says.
However, money market funds are not risk-free. During times of great market stress, money market funds have failed. “In 2008, the Reserve Primary Fund ‘broke the buck’ when Lehman Brothers declared bankruptcy,” says Jeff Fisher, managing principal and head of investment strategy at Peapack-Gladstone Bank. A money market fund “breaks the buck” when its NAV per share falls below $1.
It’s also important to note that money market funds do not possess the same degree of protection that high-yield savings accounts or CDs do. “Money market funds are not bank deposits and therefore are not backed by (Federal Deposit Insurance Corp.) insurance,” Fisher says.
That being said, regulations were put in place after the Great Recession to prevent money market funds from breaking the buck in the future. “In response, the SEC amended Rule 2a-7, which increased the resilience of money market funds and made them much safer than they used to be,” Smith says.
Here’s a look at seven of the best money market mutual funds, and some exchange-traded fund, or ETF, equivalents to buy in 2023:
| Fund | Expense ratio | 7-day SEC Yield (as of Oct. 9) |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | 5.3% |
| JPMorgan Prime Money Market Fund (VMVXX) | 0.50% | 5.2% |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.15% | 3.4% |
| Invesco Government Money Market Fund (INAXX) | 0.32% | 4.9% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.14% | 4.97%* |
| iShares 0-3 Month Treasury Bond ETF (SGOV) | 0.07% | 5.37%* |
| Invesco Short Term Treasury ETF (TBLL) | 0.08% | 5.22%* |
*30-day SEC yield.
Vanguard Federal Money Market Fund (VMFXX)
“Money market funds are highly correlated with short-term interest rates. If you look backward at how much the federal funds target rate has changed over the past year, you’ll see that money market rates have moved in lockstep with them,” Smith says. Case in point, a popular pick from Vanguard, VMFXX, pays a seven-day SEC yield of 5.3%.
VMFXX invests virtually all of its assets in cash, U.S. government bonds and repurchase agreements that are collateralized by U.S. government bonds. VMFXX’s portfolio has a weighted-average maturity of 20 days, which virtually eliminates interest rate risk. Thanks to this, the fund can be a jack-of-all-trades as a short-term savings instrument, an emergency reserve or a general allocation to cash.
JPMorgan Prime Money Market Fund (VMVXX)
“Prime money market funds like VMVXX invest in debt securities issued by corporations, government agencies and government-sponsored entities,” Fisher says. In addition to the usual U.S. government bonds and repurchase agreements, VMVXX is also able to target corporate-issued floating-rate notes, commercial paper and asset-backed securities.
Like all money market funds, VMVXX attempts to maintain a NAV of $1 but has a slightly higher credit risk. While its allocation to non-government-issued securities can enhance yield, it also increases credit risk. For investors who don’t mind this risk-return trade-off, VMVXX can be a decent way of enhancing income potential while still keeping volatility very low.
Vanguard Municipal Money Market Fund (VMSXX)
For investors in a high income bracket looking for a money market fund in a taxable account, funds like VMSXX can be a great alternative. “Tax-exempt money market funds like VMSXX invest in debt securities issued by states, counties, school districts and other municipal borrowers,” Fisher says. “This income is exempt from U.S. income taxes and, in some instances, from state income taxes.”
Despite having a lower seven-day SEC yield of 3.4%, the after-tax net yield of VMSXX could be significantly better depending on an investor’s tax circumstances. This fund currently holds 810 tax-exempt securities averaging nine days until maturity. Like all Vanguard Admiral Shares funds, VMSXX requires a $3,000 minimum investment.
Invesco Government Money Market Fund (INAXX)
“Government money market funds invest in cash, agency debt, government securities or repurchase agreements,” Arndt says. Compared to prime money market funds, they tend to have a lower risk of default but also lower yields. A fund in this category is INAXX, which currently sports a seven-day SEC yield of 4.9% for the investor-class shares.
For investors with a smaller portfolio or those looking to make many small contributions, INAXX might be ideal. The fund’s initial minimum required investment is only $1,000, while subsequent purchases must be at least $50. Like most money market funds, INAXX makes monthly distributions and maintains a stable NAV of $1 per share at all times.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
All of the previous options were mutual funds, which are traded and priced once a day after market close. For investors who desire even greater liquidity and the ability to trade throughout the day, a cash-like ETF can be used as a substitute. These ETFs are not considered true money market funds as their NAV can fluctuate, but they possess very low volatility and virtually no credit risk.
A popular pick is BIL, which tracks the Bloomberg 1-3 Month U.S. Treasury Bill Index. As the index name suggests, BIL only holds AA1- and AAA-rated U.S. Treasury bills, or T-bills, with one to three months until maturity. This gives it low interest rate risk with an average duration of 0.14 years, but also a current yield to maturity of 5.4% that moves in lockstep with prevailing interest rates.
iShares 0-3 Month Treasury Bond ETF (SGOV)
To compete with BIL, BlackRock launched SGOV, which normally charges a 0.13% expense ratio. To entice investors even more, BlackRock waived part of the expense ratio, reducing it to 0.07% through June 30, 2024. This makes SGOV one of the cheapest ultra-short-term Treasury ETFs on the market. To date, the ETF has attracted more than $16 billion in assets under management.
Otherwise, SGOV has very similar characteristics to BIL. The ETF tracks the ICE 0-3 Month US Treasury Securities Index, which gives it a slightly shorter effective duration of 0.09 years compared to BIL. Its average yield to maturity is the same, sitting at 5.4%. Both ETFs also make monthly distributions, which can be desirable for investors seeking regular income.
Invesco Short Term Treasury ETF (TBLL)
Finally, investors can opt for TBLL, which was known as Invesco Treasury Collateral ETF (CLTL) prior to a name and ticker change effective Aug. 25. This ETF was intended to be used as a way to hold cash collateral for derivatives such as futures and swaps. However, it can also be used as a plain old-fashioned way of holding cash in a brokerage account while benefiting from high liquidity and monthly distributions.
The ETF’s current holdings are 100% invested in AA-rated U.S. Treasurys with a maturity of less than a year. Compared to BIL and SGOV, TBLL has a slightly higher effective duration of 0.34 years, but the interest rate risk is still negligible. Currently, the ETF has a 30-day SEC yield of 5.2%. As noted earlier, ETFs like TBLL are not, strictly speaking, money market funds and therefore do not maintain a stable NAV.
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7 Money Market Funds to Buy for Safety originally appeared on usnews.com
Update 10/09/23: This story was previously published at an earlier date and has been updated with new information.
