Most investors recognize that money market funds offer a secure way to hold cash in a brokerage account while still earning competitive interest.
“If you have cash that you may need to access soon, a high-yielding money market fund is a good place to park it safely,” says Jim Penna, senior manager of retirement services at VectorVest.
Money market funds are built for cash management. They hold high-quality, short-maturity, liquid fixed-income securities, maintaining a stable net asset value (NAV) of $1 per share. They also pay monthly income based on prevailing interest rates and are easy to buy and sell.
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However, it’s essential to note that not all money market funds are the same. There is significant variation in their structure.
For example, Charles Schwab Corp. (ticker: SCHW) offers three main types of money market funds: prime, government and municipal. Each category differs in the securities they hold, the associated risks and the potential returns.
Still, Schwab’s lineup shares some common characteristics: a 0.34% net expense ratio for the non-institutional investor share class, no minimum investment requirements and no transaction fees, making them accessible for a wide range of investors.
Here are five of the best Charles Schwab money market funds to buy:
| Fund | Expense ratio | 7-day SEC yield as of Sept. 10 |
| Schwab Value Advantage Money Fund (SWVXX) | 0.34% | 5.1% |
| Schwab Government Money Fund (SNVXX) | 0.34% | 5.0% |
| Schwab U.S. Treasury Money Fund (SNSXX) | 0.34% | 4.9% |
| Schwab Municipal Money Fund (SWTXX) | 0.34% | 2.8% |
| Schwab California Municipal Money Fund (SWKXX) | 0.34% | 2.6% |
Schwab Value Advantage Money Fund (SWVXX)
“One of the Schwab money market funds I like is SWVXX,” Penna says. “It invests in short-term securities issued by the U.S. government, corporations and financial institutions.” SWVXX’s broad portfolio mandate is made possible because it is classified as a “prime” money market fund. This gives it greater leeway to seek yield outside of just safer government-issued securities like Treasurys.
Currently, investors in SWVXX can expect a seven-day SEC yield of 5.1%. This is a standardized calculation of income for money market funds, reflecting the average income paid out over the previous week, net of fees and waivers. As expected of a good money market fund, SWVXX maintains a weekly liquid asset level of 55.2%, which means it’s easily able to meet potential redemptions.
Schwab Government Money Fund (SNVXX)
“Ask whether you’re seeking to maximize yield from your money market fund and therefore are comfortable with it investing in more exotic short-term, asset-backed securities and commercial paper, or want to focus on a ‘risk-off’ style safety with a concentration on U.S. government-backed securities,” says Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.
All money market funds are considered “safe,” but the “safest” ones are government money market funds. These types of money market funds must invest at least 99.5% of their portfolio in government-issued debt securities, or repurchase agreements fully collateralized by them. However, they usually pay slightly lower yields than prime money market funds. SNVXX pays a 5% seven-day SEC yield.
Schwab U.S. Treasury Money Fund (SNSXX)
“Consider what is inside your money market fund — i.e., what the money market invests in,” Schulman says. “For example, Treasury income is not subject to state income tax, whereas some of the higher-yielding money market accounts that invest in short-term corporate securities will be, which can make a noticeable after-tax income difference for people in high-tax states like California or New York.”
If you want to focus solely on state-income-exempt Treasurys, the Schwab money market fund to buy is SNSXX. Unlike most government money market funds, this fund does not hold any Treasury obligations or repurchase agreements. Instead, it only holds Treasury bills, or T-bills, with a weighted average maturity of 47.8 days and 100% weekly liquid assets. SNSXX pays a 4.9% seven-day SEC yield.
Schwab Municipal Money Fund (SWTXX)
“If paying taxes is the main concern, then you may want a municipal money market fund where the majority of income won’t be subject to federal income taxes,” Schulman says. As the name suggests, these money market funds typically hold securities issued by state and local government agencies, such as public universities, hospitals, utilities and transportation authorities.
On the surface, SWTXX’s 2.8% seven-day SEC yield might seem low, but don’t be fooled. This yield is free from federal taxes, and the actual value becomes more attractive when you consider the tax-equivalent yield, adjusted to reflect what you’d earn if the income were taxed. You can use third-party calculators to input your tax bracket and figure out how SWTXX’s yield compares to taxable money market funds.
Schwab California Municipal Money Fund (SWKXX)
The income from most municipal money market funds is exempt from federal income tax, but not necessarily from state income tax. The exception is if an investor resides in the same state where the fund’s underlying securities are issued. However, most municipal money market funds have a nationally diversified portfolio composition, which precludes investors from receiving this tax advantage.
For investors living in a state with high income tax rates like California, a state-specific municipal money market fund like SWKXX is ideal. It only holds debt securities issued by the state of California and its municipal agencies. While SWKXX pays a 2.6% seven-day SEC yield, remember to calculate the tax-equivalent yield for a more accurate picture of its return, especially if you’re in a high tax bracket.
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5 Best Charles Schwab Money Market Funds originally appeared on usnews.com
Update 09/11/24: This story was previously published at an earlier date and has been updated with new information.
