As of Jan. 31, the Federal Reserve made a strategic move to pause hiking its benchmark interest rate for the fourth consecutive time, maintaining it within the range of 5.25% to 5.5%.
This decision underscores the Fed’s cautious approach, aiming to closely monitor inflation trends and ensure they trend steadily toward a long-term target of 2%, while also reducing its balance sheet, in a move known as quantitative tightening. This approach has significantly influenced market expectations, tempering any immediate anticipation of rate cuts.
The CME FedWatch tool, which analyzes interest rate futures to gauge market expectations for Fed policy changes, is now indicating an 84% likelihood that rates will be maintained at the upcoming Mar. 20 meeting.
However, this “higher for longer” interest rate environment is particularly advantageous for investors in money market funds, many of which are currently offering yields around or exceeding 5%.
“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.
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These unique mutual funds primarily invest in high-quality, very short-maturity fixed-income securities, such as Treasury bills, commercial paper, repurchase agreements and certificates of deposit, or CDs. By doing so, they offer investors a low-risk option for managing their cash.
“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.
Functionally, money market funds are designed to maintain a net asset value, or NAV, pegged to $1, thereby providing stability and security of the principal investment while generating monthly income.
This feature makes money market funds an ideal vehicle for investors looking to keep cash safe in their brokerage accounts, while offering a competitive income stream that currently exceeds the average yields of dividend stocks with virtually no market risk.
“For investors, it’s like you’re getting paid to be patient while the Federal Reserve works toward taming inflation,” Smith says.
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 in 2024:
| Fund | Expense Ratio | 7-day SEC yield |
| Vanguard Treasury Money Market Fund (ticker: VUSXX) | 0.09% | 5.3% |
| Schwab Value Advantage Money Fund – Investor Shares (SWVXX) | 0.34% | 5.2% |
| North Capital Treasury Money Market Fund (NCGXX) | 0.00% | 5.4% |
| Fidelity Tax-Exempt Money Market Fund (FMOXX) | 0.42% | 4.0% |
| Invesco Ultra Short Duration ETF (GSY) | 0.22% | 5.5%* |
| BlackRock Ultra Short-Term Bond ETF (ICSH) | 0.08% | 5.4%* |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.1356% | 5.2%* |
* Denotes 30-day SEC yield. These funds are ETFs and not technically money market funds.Note: FMOXX is a tax-advantaged fund. Its 4% yield is 5.2% on a tax-equivalent basis.
Vanguard Treasury Money Market Fund (VUSXX)
“Money market funds are highly correlated with short-term interest rates,” Smith says. “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.” For example, VUSXX is currently paying a seven-day SEC yield of 5.3%, calculated by annualizing its recent income distribution over a seven-day period.
As a government money market fund, VUSXX is legally required to hold 99.5% of its assets in cash, U.S. government-issued securities or repurchase agreements collateralized by either asset. Vanguard considers this fund to be among their most conservative options. Currently, VUSXX’s portfolio consists of 25 Treasury bills with an average of 29 days to maturity. It charges a 0.09% expense ratio.
Schwab Value Advantage Money Fund – Investor Shares (SWVXX)
“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. These include securities like commercial paper, CDs and time deposits. In exchange for higher credit risk, these can pay out better yields.
Investors looking for a prime money market fund can buy SWVXX. However, despite the presence of non-government fixed income, this fund actually pays a lower 5.2% seven-day SEC yield compared to the more conservative VUSXX. This is because SWVXX charges a much higher 0.34% net expense ratio which eats into its yield, illustrating the importance of low fees when it comes to money market funds.
North Capital Treasury Money Market Fund (NCGXX)
Cost-conscious investors looking for the most budget-friendly money market fund possible may like NCGXX, which is currently waiving expense ratios down to zero. It’s worth noting that without waivers, the fund’s expenses would come out to an absurd 4.53%, so this fund is only investable when the waivers are in place. But the fee waiver, coupled with no minimum required investments, makes NCGXX one of the most affordable and accessible money market funds available today. Despite being classified as an institutional class fund, NCGXX is available to retail investors.
By waiving its expense ratio, NCGXX is able to pay out the highest seven-day SEC yield on this list at 5.4%. Similar to VUSXX, NCGXX is a government money market fund, restricted to only holding U.S. government-issued securities, cash or repurchase agreements collateralized by either. Right now, the fund’s portfolio is held in short-term Treasury bills, most of which yield above 5.3% individually.
[See: 7 Best ETFs to Buy Now.]
Fidelity Tax-Exempt Money Market Fund (FMOXX)
“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.” These types of money market funds are particularly suitable for high income bracket investors who have maxed out contributions to tax-advantaged accounts like a 401(k).
A longstanding tax-exempt money market fund is FMOXX, which debuted in November 1983. The distributions from FMOXX are exempt from federal income tax, and from the federal alternative minimum tax under normal circumstances. Currently, investors can expect a 4% seven-day SEC yield, equal to 5.2% on a tax-equivalent basis. However, the fund does charge a higher 0.42% expense ratio.
Invesco Ultra Short Duration ETF (GSY)
Investors who prefer the ability to trade throughout the day as opposed to buying only at market close can opt for an ETF over a money market mutual fund. While money market ETFs do not exist in the U.S., there are numerous ultra-short-term bond and Treasury bill ETFs that serve a similar purpose. Like money market funds, these funds have very low volatility and provide monthly income.
A great example is GSY, which holds a mixture of very short-maturity fixed-income instruments issued by both corporations and government entities. However, investors should note that unlike a money market fund, the NAV of GSY is not pegged at $1, and can fluctuate more. GSY currently pays a 5.5% 30-day SEC yield, charges a 0.22% expense ratio and pays monthly distributions.
BlackRock Ultra Short-Term Bond ETF (ICSH)
As with GSY, ICSH is not a money market fund, but it is functionally similar in terms of risk and return. This fund actively selects and manages a portfolio of short-term, high-quality fixed income to provide a combination of low volatility and liquidity. Its holdings currently include the usual commercial paper, repurchase agreements and floating rate notes, allowing it to adjust quickly to short-term rates.
At the time of writing, investors can expect a competitive 5.4% 30-day SEC yield from ICSH. The fund is also very liquid, trading with a low 0.02% 30-day median bid-ask spread. The majority of its holdings are rated A, with all holdings being investment grade (BBB) and above. As with GSY and the previous money market funds, ICSH pays monthly distributions. Investors can expect a low 0.08% expense ratio.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
Both GSY and ICSH feature fixed-income securities issued by corporations, which, despite their investment grade credit ratings, carry default risk. In the event of a credit crisis these securities may lose value, causing the price of GSY or ICSH to drop temporarily. For higher safety of principal, investors may prefer an ETF like BIL which only focuses on government-issued Treasury bills.
BIL’s current benchmark is the Bloomberg 1-3 Month U.S. Treasury Bill Index, which as its name suggests passively tracks a portfolio of Treasury bills with one to three months in maturity. This provides BIL with an aggregate AAA credit rating along with a competitive 30-day SEC yield of 5.2%. Treasury bills are also highly liquid, which helps BIL maintain a very low 0.01% 30-day median bid-ask spread.
[SEE: 7 Best Vanguard Funds to Buy and Hold]
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7 Best Money Market Funds to Buy for Safety originally appeared on usnews.com
Update 02/12/24: This story was published at an earlier date and has been updated with new information.
