Money market funds get left behind during stock market rallies, but there’s no denying that lately they’ve offered stable cash flow. Investors approaching retirement may give these funds a closer look, especially during a volatile stock market.
Money market funds are less risky than other investments and are only a step up from cash. However, they aren’t only for aspiring retirees. Amy Braun-Bostich, a certified financial planner, private wealth advisor and CEO of Braun-Bostich & Associates, offers another application for these funds: “Money market funds are a good place to store cash for short-term income needs (less than a year),” she says. “They provide liquidity and higher rates than bank money markets.”
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It’s important to remember that money market funds do not have Federal Deposit Insurance Corp., or FDIC, insurance. That means they don’t have the same insurance as the money you leave in the bank.
However, money market funds primarily invest in short-term government bonds, municipal bonds and corporate bonds. The short duration of these bonds increases the likelihood of preserving your investment while generating some cash flow. Money market funds are also designed to maintain a net asset value, or NAV, of $1 per share.
Money market funds are a valuable resource for people who want to lower their risk and generate some returns in the short term. Retirees may use money market accounts to generate long-term returns as well. They can also serve as a complementary piece for growth-oriented portfolios to minimize total risk.
However, there are investments that offer more cash flow if you are open to incurring more risk. The cash in your brokerage account often gets kept in a money market account until you are ready to buy shares. This model allows your money to grow while keeping it on the sidelines.
Why Invest in Vanguard Money Market Funds?
Investors can choose from a wide assortment of brokerage firms. Vanguard is just one of the available choices, but it has several perks that make it special.
“Vanguard is one of the largest asset management firms in the country. The advantage is that they offer a low-cost way for investors to get started investing at a low minimum,” Braun-Bostich explains.
The brokerage firm lets investors choose from many low-cost passive mutual funds and exchange-traded funds, or ETFs. Investors can also buy shares in actively managed funds. Vanguard has low expense ratios for most of its funds, which means you get to keep more of your returns.
Money Market Fund Risks to Keep in Mind
Regardless of whether you choose Vanguard or another firm, you should carefully review interest rates and inflation. These two metrics will impact the real return of your investments.
Interest Rate Risk
Higher interest rates will increase your money market fund’s rate. That translates into higher cash flow since bond issuers will have to use higher rates to remain competitive.
Lower interest rates have the opposite effect and reduce how much you can earn from these funds. Money market funds have short-term bonds, so their yields are more sensitive to changes in interest rates.
Inflation Risk
Inflation also plays a pivotal role and impacts the real return on your investment. If a money market fund yields 4% and inflation is at 3%, then your real return is only 1%. Real returns reflect purchasing power and offer a better perspective of a fund’s performance.
Default Risk
It’s possible for a bond issuer to default and be unable to pay an obligation. This outcome would hurt the fund’s value but is extremely unlikely since money market funds prioritize short-term bonds.
That said, Vanguard has several funds that offer investors cash flow, stability and low expense ratios. Here are five of the best money market funds available from Vanguard:
| Money Market Fund | Expense Ratio | Trailing-12-month (TTM) Yield |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | 4.98% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.09% | 4.94% |
| Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX) | 0.1% | 4.99% |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 0.16% | 3.13% |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.15% | 3.2% |
Vanguard Federal Money Market Fund (VMFXX)
This low-risk fund aims to provide a balance between cash flow and liquidity. VMFXX has a seven-day SEC yield of 5.3%. The investment minimum is $3,000, and the fund has a 0.11% expense ratio.
Nearly 100% of the fund’s total assets go into a combination of cash, U.S. government securities and repurchase agreements that are collateralized by the U.S. government or cash. U.S. government bonds are among the safest investments available, and the government can always print more money to cover debt obligations if necessary, which would increase inflation.
The fund has 168 holdings with an average maturity of 28 days. VMFXX has $284.5 billion in total net assets.
[7 Best Money Market Funds to Buy for Safety]
Vanguard Treasury Money Market Fund (VUSXX)
VUSXX also has a $3,000 minimum investment requirement and has a seven-day SEC yield of 5.3%. The fund has a 0.09% expense ratio and $64.5 billion in assets. The portfolio consists of 30 holdings with an average maturity of 40 days.
VUSXX primarily invests in U.S. Treasury securities. At least 80% of the fund’s total assets are invested in Treasury bills and repurchase agreements collateralized by Treasury securities. As a government money market fund, it is required to invest at least 99.5% of its assets in such bonds, cash and repurchase agreements from the government.
VUSXX is one of the lowest-risk investment funds that Vanguard offers.
Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX)
VMRXX offers a seven-day SEC yield of 5.3% and requires a $3,000 minimum investment to get started. The fund has a 0.1% expense ratio.
The fund has been around since 1989 and now has $115.8 billion in assets. That capital is spread across 177 holdings with an average maturity of 28 days.
The fund’s assets are mostly split between repurchase agreements, U.S. government obligations and U.S. Treasury bills. Each of those categories gets approximately one-third of the fund’s total assets. Yankee, or foreign, bonds make up less than 1% of the fund’s total holdings.
Vanguard New York Municipal Money Market Fund (VYFXX)
VYFXX has a $3,000 minimum investment requirement and concentrates on New York municipal bonds. While the fund has a lower seven-day SEC yield of 2.3%, this fund offers distributions that are exempt from federal and New York personal income taxes.
The trade-off of a high yield for better tax protections is more suited to investors with higher incomes. Earning more money can result in a higher tax bracket for every dollar you earn on top of your salary. Municipal bonds offer tax protections, but if you’re in a lower tax bracket you may be leaving money on the table by not choosing a higher-yielding fund.
VYFXX has a 0.16% expense ratio. The fund has been around since 1997 and has $3 billion in total assets spread across 279 holdings. The average maturity for those holdings is 11 days.
Vanguard Municipal Money Market Fund (VMSXX)
VMSXX has a $3,000 minimum investment and a 0.15% expense ratio. The fund has a seven-day SEC yield of 2.4%. It consists of bonds that are exempt from federal income taxes and is another of the lowest-risk investments available from Vanguard.
The brokerage firm recommends this fund for individuals in high tax brackets who want to save money for a short-term goal. VMSXX has $17.7 billion in total assets that are spread across 831 holdings. The average maturity for the fund’s holdings is 12 days.
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5 Best Vanguard Money Market Funds originally appeared on usnews.com
Update 01/23/24: This story was previously published at an earlier date and has been updated with new information.
