Money market funds don’t deliver exciting returns, but they make up for it with stable cash flow. While any investor can benefit from additional income, money market funds are especially useful for people who are approaching retirement.
These funds cater to investors who want more stability and less risk. Money market funds don’t plummet in value during sharp stock market corrections. These funds can maintain a similar price point while delivering a good yield.
The Investment Company Institute notes that investors often put their capital into money market funds to take advantage of lower risk and higher liquidity, while also earning higher returns than traditional savings accounts.
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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, these funds invest in short-term government bonds and other low-risk assets. Fund managers aim to preserve a net asset value, or NAV, price of $1 per share. Investors can choose whether to receive cash flow from their position or reinvest it into the money market fund.
Why Invest in Vanguard Money Market Funds?
Vanguard is known for offering some of the lowest expense ratios in the industry. Low expense ratios allow you to keep more of the fund’s returns. The expense ratio represents the invisible cost of doing business with a managed fund. Passively managed funds have lower expense ratios, while actively managed funds are more expensive.
Short-term opportunities are ripe for investors in money market funds now. “Given the current interest rate environment, money market funds are offering a substantial yield,” says Allison Walsh, senior vice president at Income Research + Management.
Higher interest rates allow money market fund investors to realize higher cash flow from their investments. While equities may falter during periods of high rates, these funds can deliver elevated gains.
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 rates. These two metrics will impact the real return of your investments.
Interest Rate Risk
Money market funds are generating more cash flow for investors due to elevated interest rates. However, the Federal Reserve will eventually lower interest rates, and that will hurt the total return from money market funds.
“Given the shorter nature of the investments within the fund, any changes in interest rates will flow through to returns relatively quickly. Investors should evaluate their expected liquidity needs and understand the risk that interest rates may not stay elevated,” Walsh explains. “To lock in today’s higher rates, investors may want to consider extending duration beyond those offered by money markets.”
Financial products like certificates of deposit can let you lock in rates for a longer amount of time, but funds from a CD are less accessible than cash in a money market fund.
Inflation Risk
Inflation impacts the real return of your cash flow. If a fund yields 3% but inflation is at 2%, then your real return is only 1%. Stocks have a better chance of outperforming inflation. While investors may prefer the stability of money market funds, it’s important to assess the gap between your interest rate and the rate of inflation.
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 | 7-day SEC yield as of April 30 | Expense ratio |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 5.3% | 0.11% |
| Vanguard Treasury Money Market Fund (VUSXX) | 5.3% | 0.09% |
| Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX) | 5.3% | 0.10% |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 3.6% | 0.16% |
| Vanguard Municipal Money Market Fund (VMSXX) | 3.6% | 0.15% |
Vanguard Federal Money Market Fund (VMFXX)
The Vanguard Federal Money Market Fund has been around since 1981, and at present it has a 0.11% expense ratio and requires a $3,000 minimum investment. Investors right now enjoy a 7-day SEC yield of 5.3%, and the actively managed fund is also up 1.8% year to date as of April 30.
VMFXX invests most of its capital in U.S. government securities. The fund prioritizes short-term government bonds, which makes income more sensitive to changes in interest rates. The fund has 226 total holdings with an average maturity of 18 days. As of the end of March, VMFXX had $297.4 billion in total net assets.
Although bond holdings have interest rate sensitivity, government bonds overall are some of the safest investments available. The government can always print more money if it needs to cover any bond payments.
[READ: 5 Best Charles Schwab Money Market Funds]
Vanguard Treasury Money Market Fund (VUSXX)
The Vanguard Treasury Money Market Fund also requires a $3,000 minimum investment to get started, and it has a similar year-to-date return, at 1.8%. The 7-day SEC yield stands at 5.3%, and the expense ratio is only 0.09%. The fund invests at least 80% of its assets in debt issued directly by the U.S. government. The actively managed VUSXX currently has 97% invested in U.S. Treasury bills and 2.6% in U.S. government obligations.
The fund has 29 holdings with an average maturity of 38 days. VUSXX prioritizes high cash flow and liquidity, and that strategy has attracted $72.2 billion in total net assets from investors.
Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX)
This actively managed fund has similar characteristics to the other Vanguard money market funds. It has a 7-day SEC yield of 5.3% and a 0.1% expense ratio. You will need to make a $3,000 minimum investment to get started.
Most of VMRXX’s holdings are short-term government bonds. It’s an optimal fund for investors who have short-term savings goals and want to generate high cash flow from securities issued by the U.S. government or its agencies.
VMRXX has 228 holdings with an average maturity of 19 days. VMRXX has $117.9 billion in assets under management as of March 31.
Vanguard New York Municipal Money Market Fund (VYFXX)
The actively managed Vanguard New York Municipal Money Market Fund also has a $3,000 investment minimum, but it has some notable differences in expense ratio and yield from some of the other funds on this list. New York investors still get a low 0.16% expense ratio, which is only slightly higher than the other funds’ costs. Investors also receive a 3.6% 7-day SEC yield as of April 30.
The fund is designed for New Yorkers in a higher tax bracket who have a short-term savings goal and don’t want to pay taxes on their cash flow. It’s also considered one of Vanguard’s most conservative investment options, according to the fund website. At least 80% of the fund’s total assets are in high-quality, short-term New York municipal securities.
VYFXX prioritizes securities that are exempt from federal and New York personal income taxes, and it aims to maintain a net asset value of $1 per share. It has 288 holdings with an average maturity of eight days. VYFXX has $3.1 billion in total net assets and is on a monthly distribution schedule.
Vanguard Municipal Money Market Fund (VMSXX)
The Vanguard Municipal Money Market Fund offers broader exposure to municipal bonds for investors who aren’t located in New York. Started in 1980, the actively managed fund now has a 0.15% expense ratio and a 3.6% 7-day SEC yield. You’ll have to put in at least $3,000 to start a position in this fund.
The fund maintains a net asset value of $1 per share while allocating capital into securities that are exempt from federal personal income taxes. The low-risk fund has $17.5 billion in total assets that are spread across 833 holdings. Securities in the fund have an average maturity of 10 days.
Returns haven’t been the highest, but like any money market fund, VMSXX offers more stability during economic slowdowns. As the fund’s advisor, Vanguard Fixed Income Group aims to add value by tweaking the fund’s maturity structure based on independent research, interest rate projections and the slope of the yield curve.
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5 Best Vanguard Money Market Funds originally appeared on usnews.com
Update 05/01/24: This story was previously published at an earlier date and has been updated with new information.
