When discussing investment safety, it’s crucial to define what “safety” truly means. By doing so, investors can optimize their investment selection.
Safety can mean a low risk of permanently losing investment capital. For example, shareholders of Enron faced a complete wipeout following its accounting scandal, and Bed Bath & Beyond investors experienced similar outcomes following the company’s bankruptcy, delisting and share cancellation.
Another aspect of safety is the minimization of volatility. Even stable, well-established and defensive consumer staples companies experience share price fluctuations in response to market dynamics. Similarly, bond values can fluctuate due to changes in interest rates and credit conditions.
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In the current investment environment, only a few assets can truly fulfill both criteria of safety. One notable category is money market funds. These specialized mutual funds are designed to offer a blend of capital preservation and income potential.
“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.
These funds operate with a fixed net asset value (NAV) of $1 per share, unlike other mutual funds whose NAV can fluctuate. Under normal conditions, the NAV of a money market fund should not fall below $1, a very rare situation known in the industry as “breaking the buck.”
Investments within money market funds are placed into high-quality, fixed-income instruments such as Treasury bills, repurchase agreements, promissory notes and commercial paper.
These instruments share key characteristics: They are of high credit quality, minimizing the risk of default; they have short maturities, which makes them less sensitive to interest rate changes; and they are highly liquid, ensuring they can be bought and sold with ease.
“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. “For investors, it’s like you’re getting paid to be patient while the Federal Reserve works toward taming inflation.”
Here are seven of the best money market mutual funds, and some exchange-traded fund, or ETF, substitutes to buy for safety in 2024:
| Money market fund | Expense ratio | 7-day SEC yield |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | 5.3% |
| Fidelity Money Market Fund (SPRXX) | 0.42% | 5% |
| North Capital Treasury Money Market Fund (NCGXX) | 0% | 5.4% |
| Schwab Municipal Money Fund – Investor Shares (SWTXX) | 0.34% | 3.3% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 0.10% | 5.1%* |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.2%* |
| Alpha Architect 1-3 Month Box ETF (BOXX) | 0.19% | 5.8%** |
* Denotes 30-day SEC yield. These funds are ETFs and not technically money market funds. **Denotes average yield to option expiration for this ETF.
Vanguard Federal Money Market Fund (VMFXX)
“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, VMFXX is currently paying a seven-day SEC yield of 5.3%, which sits in the federal funds target range of 5.25% to 5.5%.
VMFXX is classified as a government money market fund. Legally, this classification restricts VMFXX’s holdings to cash, U.S.-government-issued securities such as Treasurys or repurchase agreements collateralized by either of the two. Vanguard currently rates the risk of this fund as a “one” on its five-point scale. VMFXX requires a $3,000 minimum investment and charges a 0.11% expense ratio.
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. Unlike government money market funds, prime money market funds can also invest in commercial paper, certificates of deposit and time deposits.
A longstanding example of a prime money market fund is SPRXX, which dates back to 1989 and has weathered many market crises. However, investors should note that despite its riskier assets compared to a money market fund, SPRXX actually pays a lower seven-day SEC yield compared to VMFXX at 5%. The culprit? A higher 0.42% expense ratio, which eats into the net yield received by investors.
North Capital Treasury Money Market Fund (NCGXX)
For money market funds, an easy way to boost seven-day SEC yields is by keeping fees low. A great example is NCGXX, which is currently waiving expense ratios to 0%. Thus, this money market fund is effectively free for investors to buy and hold. Despite being classified as an institutional class fund, NCCGX is open to retail investors and currently pays a 5.4% seven-day SEC yield.
Like VMFXX, NCGXX is a government money market fund and is subject to the same restrictions. Currently, the fund’s portfolio consists of numerous Treasury bills, which are among the safest of assets due to their ironclad credit quality and low interest rate sensitivity. As with the previous money market funds, investors in NCGXX can also expect a monthly distribution frequency.
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.” Like their higher-risk municipal bond fund counterparts, tax-exempt money market funds are best suited for high-income-bracket investors.
Schwab’s primary offering in this niche is SWTXX, which invests in short-term municipal-, state- and local-government-issued securities exempt from federal income taxes. This currently includes instruments such as variable-rate demand notes, tender option bonds and commercial paper. Investors can expect a 3.3% seven-day SEC yield and a 0.34% expense ratio, with no minimum required investments.
[READ: Net Investment Income Tax: Impact on High-Net-Worth Portfolios]
Vanguard Ultra-Short Bond ETF (VUSB)
One limitation of money market funds is their timing for access to funds. For instance, if you decide to sell shares of a money market fund during the trading day to capitalize on a buying opportunity, you will not have immediate access to the funds. The sell order is only processed at the end of the trading day when the fund’s NAV is calculated, and the cash may not be settled and available until the following day.
To circumvent this, investors can consider an ultra-short bond ETF like VUSB. This ETF holds an assortment of securities similar to that of a money market fund, but it does not have a fixed NAV, which gives it slightly higher risk. However, you can trade shares of this ETF throughout the day, making it highly versatile for cash management. VUSB pays a 5.1% 30-day SEC yield and charges 0.1%.
Global X 1-3 Month T-Bill ETF (CLIP)
VUSB’s portfolio includes the use of asset-backed and investment-grade corporate securities, which pay higher yields than government Treasurys but also come with greater credit risk. Investors who value safety above all and are looking for intra-day liquidity may prefer a Treasury bill ETF like CLIP instead. This ETF tracks the Solactive 1-3-month U.S. T-Bill Index for a 0.07% expense ratio.
CLIP functions fairly simply. On an ongoing basis, the ETF will purchase and sell the appropriate combination of Treasury bills to replicate the returns of its benchmark index, while also paying monthly distributions. Currently, investors can expect a 5.2% 30-day SEC yield. However, keep in mind that as with VUSB, the NAV of CLIP is not fixed to a certain price and can fluctuate, albeit minimally in most cases.
Alpha Architect 1-3 Month Box ETF (BOXX)
Advanced investors comfortable with the use of derivatives like options can use BOXX as a liquid and tax-efficient alternative to money market funds. This unique ETF seeks to deliver a total return similar to that of 1-to-3-month Treasury bills, but without the usual interest income distributions. Instead, the ETF employs a multi-leg options strategy known as a “box spread” to synthetically replicate their returns.
In the case of BOXX, the strategy uses both call and put options with the same expiration date but different strike prices to simulate the steady, predictable returns of Treasury bills. BOXX’s chart currently shows a steadily upward trending NAV, which reflects the returns of a simulated Treasury bill ladder with periodic interest payments reinvested. The ETF charges a 0.19% expense ratio.
[READ: 5 Best Charles Schwab Money Market Funds]
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7 Best Money Market Funds to Buy for Safety originally appeared on usnews.com
Update 04/15/24: This story was published at an earlier date and has been updated with new information.
