Money market funds don’t offer the highest returns. They get left in the dust when the stock market rallies, but when equities tumble, investors give these funds a closer look.
Money market funds generally don’t endure the same volatility as stocks. While a Federal Reserve rate hike can cause dramatic stock price swings within minutes, money market funds remain stable during turbulent markets. These funds can act as safe havens during economic uncertainty.
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Janelle McCreary, wealth advisor at RMB Capital, says the low-risk nature of money market funds can make them useful assets for investors.
“Money market funds are considered one of the lowest risk investments — just a step up from cash,” McCreary says. “This might be a good option for someone who has a big expense, such as a remodel or wedding in the next year, and wants their cash to remain liquid but still produce a return. Money markets are currently paying 4-5% with a low risk of losing principal.”
You won’t see money market funds outperform growth stock funds during bullish markets, but what makes them so special during economic uncertainty? Instead of making speculative, risky investments, money market fund managers focus on short-term debt. These assets provide a small but reliable return on cash.
“While they usually deliver a lower interest rate than some of the other investment opportunities, they are typically comprised of low-risk securities like Treasury bills or CDs that aim to minimize the risk of losing money,” Ray Clark, global head of market research and strategy at VectorVest Inc., says. “These funds are attractive to individuals who may need access to the money tied up in the accounts.”
The Risks of Money Market Funds
Money market funds offer low-risk returns. While these funds are typically safer than buying stocks, investors risk losing out on better opportunities. Every dollar you put into a money market fund is another dollar you cannot put into a stock or mutual fund that provides a 10% return.
“There is always the risk of the interest rate changes that can lead to a decrease in the fund’s net asset value (NAV),” Clark says. “While these funds invest in relatively safe and short-term securities, there is also a small degree of credit risk if one of the issuers of the securities defaults on their obligations.”
Interest rates affect the value of debt investments such as bonds and CDs. A rising interest rate makes previously issued fixed-rate debt less valuable to investors. Rising interest rates can reduce the value of the money market fund’s holdings and result in losses.
Inflation is another risk. A profitable money market fund may look like a gain on paper, but McCreary cautions investors to consider how inflation impacts actual returns.
“If a money market is yielding 4.5%, but the current rate of inflation is 4.65%, an investor has still lost buying power,” she says. “While the rate is historically great, if it’s not keeping up with inflation, then an investor is still losing.”
Money market funds can still generate higher returns than cash sitting in your bank account while incurring minimal risk. They tend to be more resilient since they can buy new debt with higher rates.
Vanguard offers several money market funds that combine low-risk returns with low expense ratios:
| Money market fund | Expense ratio |
| Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX) | 0.10% |
| Vanguard Federal Money Market Fund (VMFXX) | 0.11% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.09% |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.15% |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 0.16% |
Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX)
VMRXX maintains a NAV of $1 per share while investing at least 99.5% of its total assets in cash, U.S. government securities and repurchase agreements for government securities. The fund has a $3,000 minimum investment and a 0.10% expense ratio. It has an annualized return of 1.6% over the past five years.
Vanguard Federal Money Market Fund (VMFXX)
VMFXX has a NAV of $1 per share and focuses on short-term U.S. government securities. Vanguard considers the fund a conservative investment option. The fund has an initial investment of $3,000 and an expense ratio of 0.11%. VMFXX has an annualized return of 1.5% over the past five years.
Vanguard Treasury Money Market Fund (VUSXX)
VUSXX has a NAV of $1 per share and a $3,000 minimum investment. The fund has an expense ratio of 0.09% and invests 80% of its assets in debt issued by the government. VUSXX has a large concentration in Treasury bills, which can be advantageous for risk-averse investors.
“One of the largest benefits of Treasury bills is their low risk,” says Kris Maksimovich, president at Global Wealth Advisors. “As a U.S. government debt obligation, there is zero default risk. With maturity dates ranging from just a few days to one year, their yield is based on interest rate expectations.”
VUSXX has generated an annualized return of 1.5% over the past five years.
[READ: What’s the Best Treasury ETF? 7 Options for Investors]
Vanguard Municipal Money Market Fund (VMSXX)
VMSXX has a NAV of $1 per share and a 0.15% expense ratio, with a minimum investment of $3,000. VMSXX has generated a lower annualized return than the other money market funds on this list, closing in at a 1% annualized return over the past five years. While the returns look lower, municipal money market funds have tax exemptions and can be attractive to investors depending on their income levels.
“These funds offer a tax-free yield versus taxable income from traditional money market funds,” Maksimovich says. “An investor’s tax status should be considered when weighing these two options. For example, someone in the highest tax bracket might benefit from a municipal money market fund more than someone in a lower tax bracket who may wish to opt for a higher yield.”
Vanguard New York Municipal Money Market Fund (VYFXX)
VYFXX has a NAV of $1 per share and a 0.16% expense ratio. You will have to make an initial investment of $3,000 to get into this fund, which is only for New York residents. Vanguard aims to invest in assets that are exempt from federal and New York personal income taxes while maintaining the $1-per-share NAV. At least 80% of the fund’s assets go into high-quality, short-term New York municipal securities. The fund has an annualized return of 1% over the past five years. If you don’t live in New York, Vanguard has municipal money market funds for other states as well, including California, New Jersey, Ohio, Massachusetts and Pennsylvania.
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The Best Vanguard Money Market Funds originally appeared on usnews.com
Update 07/13/23: This story was previously published at an earlier date and has been updated with new information.
