In the investment world, risk and return are two sides of the same coin, with various asset classes offering different balances between the two.
For stocks, the key risk involved is market risk. This can be thought of as the price of admission for the potentially higher long-term returns that equities offer.
Stocks are subject to the ebb and flow of the market, influenced by a multitude of factors like economic changes, political events and company-specific news. While they have historically provided higher returns over the long term, they also come with the possibility of significant volatility.
Turning to bonds, a common misconception is that they are purely safe investments. However, bonds, too, come with their own set of risks, such as credit risk and interest rate risk.
Credit risk refers to the possibility of a bond issuer defaulting on its payments, while interest rate risk is the risk of bond prices falling as interest rates rise. These risks mean that bonds, while generally safer than stocks, can also lose value, like during the rising rate environment of 2022 and 2023.
Therefore, it’s important to recognize that there is no true “risk-free” asset. Even holding cash has its downside, as its value can gradually erode over time due to inflation. However, for conservative-minded investors focused on capital preservation, there are several low-risk options available.
One such option is a money market fund. These mutual funds are designed to maintain a steady net asset value, or NAV, of $1 per share, and are a great alternative to holding plain cash in a brokerage account.
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“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.
The securities held by money market funds include instruments like Treasury bills and commercial paper, which are considered very safe compared to stocks and bonds.
“The risk associated with money funds is very low, given that the SEC mandates that only securities with high credit quality and shorter maturities are eligible holdings,” Smith says.
With current high interest rates, many money market funds are also offering competitive yields, making them an attractive option for investors seeking safety and liquidity.
“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.”
Overall, their ability to provide stability and a modest income stream makes them a cornerstone for conservative investment strategies, especially in volatile market conditions.
Here’s a look at seven of the best money market mutual funds, and some exchange-traded fund, or ETF, substitutes to buy for safety today:
| Fund | Expense ratio | 7-day SEC yield as of Dec. 13 |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | 5.3% |
| Fidelity Money Market Fund (SPRXX) | 0.42% | 5.1% |
| Schwab Municipal Money Fund – Investor Shares (SWTXX) | 0.34% | 2.7% |
| North Capital Treasury Money Market Fund (NCGXX) | 0% | 5.4% |
| JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.6%* |
| Vanguard Ultra-Short Bond ETF (VUSB) | 0.1% | 5.4%* |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.2%* |
*Denotes 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. With short-term rates still elevated for the time being, VMFXX is currently paying a seven-day SEC yield of 5.3%.
As a Vanguard fund, VFMXX’s primary selling point is low fees. With a 0.11% expense ratio, investors can expect to pay around $11 in annual fees on a $10,000 investment. As a government money market fund, VFMXX only holds Treasury bills and repurchase agreements collateralized by government-issued securities. However, the fund does require a $3,000 minimum initial investment.
Fidelity Money Market Fund (SPRXX)
“Prime money market funds invest in debt securities issued by corporations, government agencies and government-sponsored entities,” says Jeff Fisher, managing principal and head of investment strategy at Peapack Private, the wealth division of Peapack-Gladstone Bank. Compared to government money market funds, prime money market funds take on slightly more credit risk but can pay higher yields.
A long-standing prime money market fund investors can buy is SPRXX, which has been offered by Fidelity since January 1989. In addition to the usual Treasury bills, or T-bills, and repurchase agreements, SPRXX also holds certificates of deposits, or CDs, time deposits and commercial paper. However, its high expense ratio of 0.42% cuts into its returns, resulting in a 5.1% seven-day SEC yield at present.
Schwab Municipal Money Fund – Investor Shares (SWTXX)
“Tax-exempt money market funds 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.” For high-income tax bracket investors, investing in a municipal money market fund can therefore offer a better net after-tax yield.
A great example is SWTXX, which holds a portfolio of state, local government and municipal-agency-issued fixed-income securities. By doing so, the interest income paid by SWTXX is exempt from federal income tax. Otherwise, SWTXX behaves similar to a regular money market fund with a steady $1 NAV per share. The fund currently pays a 2.7% seven-day SEC yield and charges a 0.34% expense ratio.
North Capital Treasury Money Market Fund (NCGXX)
Investors who are willing to consider smaller, independent fund managers outside of the big firms like Vanguard and Fidelity can find some good deals. A great example is NCGXX, which is relatively small in size with just $15 million in assets under management, or AUM. Right now, the fund is waiving fees, making it effectively free for investors to buy and hold.
Despite being classified as an institutional fund, NCGXX is very accessible to the average retail investor as it has no minimum investment requirements. With the ongoing fee waiver, investors currently get a 5.4% seven-day SEC yield, the highest on this list. As a government money market fund, NCGXX only holds the highest quality government-issued securities and repurchase agreements collateralized by them.
JPMorgan Ultra-Short Income ETF (JPST)
Money market mutual funds can only be bought and sold once per day at market close. For investors requiring greater flexibility, such as traders looking to quickly deploy a cash allocation, an ETF could be a good substitute. Some ETFs provide risk and return profiles and holdings similar to money market mutual funds, albeit without the same fixed NAV per share mechanic.
A great example is JPST, which primarily focuses on short-term and floating-rate investment-grade corporate bonds with less than a year in maturity. This ETF trades at around $50 a share and has historically provided a fairly stable share price despite not being fixed. Right now, investors can expect a 5.6% 30-day SEC yield against a 0.18% net expense ratio.
Vanguard Ultra-Short Bond ETF (VUSB)
Another money market mutual fund alternative to consider is VUSB. While Vanguard cautions that this fund shouldn’t be viewed as a substitute for a money market fund due to the risk of principal loss, it is still fairly safe. The ETF currently holds a mix of asset-backed, government- and corporate-issued fixed-income securities with maturities ranging from under one year to three years.
Overall, VUSB has a very robust credit profile, with around 21.5% of its portfolio rated AAA, 5.2% rated AA, 39.5% rated A and 34.5% rated BBB. Like most money market funds, VUSB also pays monthly distributions. Currently, investors can expect a 5.4% 30-day SEC yield. Compared to JPST, VUSB is also slightly cheaper with a 0.1% expense ratio.
Global X 1-3 Month T-Bill ETF (CLIP)
Another money market ETF alternative conservative investors can buy is CLIP. This ETF tracks the Solactive 1–3-month U.S. T-Bill Index, which as its name suggests only holds short-maturity Treasury bills. As an investment, T-bills possess a very low interest rate and credit risk, making them a safe place for investors to park cash while earning interest at prevailing rates.
As with all the previous ETFs, CLIP’s share price is not designed to remain fixed, unlike a true money market fund. Nonetheless, the ETF exhibits very low volatility, being unaffected by the gyrations of the market due to its portfolio of short-term, high-quality holdings. Currently, investors can expect a 5.2% 30-day SEC yield and a low 0.07% expense ratio.
[READ: 5 Funds Trading at the Biggest Discounts to NAV]
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7 Best Money Market Funds to Buy for Safety originally appeared on usnews.com
Update 12/14/23: This story was published at an earlier date and has been updated with new information.
