When you’re evaluating how to keep spare cash as part of a diversified investment portfolio, there are three key variables you should consider: safety, liquidity and income.
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Safety is straightforward — how can you minimize the risk of losing your principal? Liquidity means you should have access to your cash in a quickly deployable manner when you need it. Finally, there’s income — are you just letting your cash sit idle, or is it earning you interest and generating a yield?
Not all cash management instruments will meet all three of these criteria. For instance, cash in a checking account is highly liquid and protected by depositor insurance, but it earns almost no interest. Conversely, a certificate of deposit (CD) can provide a competitive fixed yield with insurance, but liquidity becomes an issue as you can’t access it before maturity without incurring penalties.
The middle ground between these options is the money market fund. This is a special type of mutual fund designed to act as a cash equivalent within a brokerage account.
“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.
Unlike regular mutual funds, money market funds have a fixed net asset value (NAV) per share of $1, meaning they don’t fluctuate — so if you invest $10,000 in a money market fund, it should stay at $10,000 barring extreme circumstances.
“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.”
When you buy one of these funds, your money is invested in high-quality short-term fixed-income securities like Treasury bills, repurchase agreements and commercial paper, all of which have a low risk of default and are heavily traded, ensuring liquidity.
Most of these funds pay interest, too — so typically every month, your money market fund will pay out a distribution, often at prevailing interest rates.
“With short-term interest rates above 5%, money market funds have again become a meaningful part of the investment landscape,” says James Dowd, CEO at North Capital. “Consumers are savvy — they will not settle for a 1% interest rate at their bank if they can easily invest in a money market fund and earn five times the return.”
Here are seven of the best money market funds to buy for 2024:
| Money Market Fund | Expense Ratio | 7-Day SEC Yield |
| North Capital Treasury Money Market Fund (ticker: NCGXX) | 0% | 5.3% |
| Fidelity Money Market Fund (SPRXX) | 0.42% | 5.0% |
| Schwab Value Advantage Money Fund – Investor Shares (SWVXX) | 0.34% | 5.1% |
| Vanguard Federal Money Market Fund (VMFXX) | 0.11% | 5.3% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.09% | 5.3% |
| Schwab Municipal Money Fund – Investor Shares (SWTXX) | 0.34% | 2.9% |
| Fidelity Tax-Exempt Money Market Fund (FMOXX) | 0.42% | 2.9% |
North Capital Treasury Money Market Fund (NCGXX)
“By offering an institutional share class with same-day liquidity to institutions and individuals, we hope to encourage all types of investors to incorporate NCGXX into their liquidity management,” Dowd says. Institutional class money market funds typically offer higher yields by virtue of lower fees, although most come with high-minimum-required investments. NCGXX, however, requires no minimum investment.
In addition, the fund has implemented a generous fee waiver, bringing its net expense ratio down to zero. As a result, NCGXX is able to pay a very competitive 5.3% seven-day SEC yield. It’s not the largest nor most prominent money market fund, with just over $19 million in assets under management (AUM), but it ranks amongst the cheapest and highest yielding ones available to retail investors.
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. These money market funds basically take on slightly higher credit risk to earn a more competitive yield versus government-only variants.
SPRXX from Fidelity is a prime money market fund. Currently it holds CDs, time deposits, Treasury repurchase agreements and financial company commercial paper. Investors can expect a 5% seven-day SEC yield, inclusive of its higher 0.42% expense ratio. However, the fund has no minimum investment requirements and can be purchased without a transaction fee on Fidelity’s brokerage platform.
Schwab Value Advantage Money Fund – Investor Shares (SWVXX)
Most of the large brokerage firms will offer a lineup of in-house branded money market funds. Charles Schwab’s offering is SWVXX, a prime money market fund that undercuts SPRXX from Fidelity with a 0.34% expense ratio. It also has no minimum required investment. Currently, investors can expect a 5.1% seven-day SEC yield, with distributions occurring on the last business day of each month.
As expected of a prime money market fund, SWVXX’s portfolio has leeway to invest in a significant array of fixed-income assets, including Treasurys, repurchase agreements, time deposits and commercial paper. On average, the assets held by SWVXX have a weighted average maturity of just 30.7 days. The daily liquid assets of this fund, stated as a percentage of total fund assets, currently sit at 55%, meaning it is able to meet potential redemptions.
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 instance, VMFXX’s current 5.3% seven-day SEC yield currently sits in the middle of the effective federal funds rate of 5.25 to 5.5%.
But unlike SPRXX and SWVXX, VMFXX is not a prime money market fund. It is actually a government money market fund, which is restricted to U.S. government- or agency-issued securities and repurchase agreements. This makes it more conservative in nature, at the cost of some yield. However, VMFXX’s lower 0.11% expense ratio allows it to pay a higher yield than SPRXX or SWVXX.
Vanguard Treasury Money Market Fund (VUSXX)
“Money market funds can be a great way to save for short-term goals like buying a car, a down payment or building your emergency savings,” says Sophoan Prak, a certified financial planner and financial advisor at Vanguard. “Generally, if you have a planned expense within one year, a money market fund can be a good investment option for it.” For maximum safety, consider VUSXX.
This government money market fund is even more conservative than VMFXX. The fund primarily invests in a portfolio of U.S. Treasury bills, or T-bills, which are government-issued bonds with less than one year remaining until maturity. Overall, VUSXX’s portfolio of T-bills has a weighted average maturity of 28 days and ironclad credit quality. The fund pays a 5.3% seven-day SEC yield and charges a 0.09% expense ratio.
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.” Consider SWTXX, which pays a 2.9% seven-day SEC yield. Upon first glance that seems rather low, but it’s actually decent considering the distributions are exempt from federal income tax.
The difference between SWTXX and a municipal bond fund like the Schwab Tax-Free Bond Fund (SWNTX) is twofold. First, the NAV per share of SWTXX is always fixed at $1, whereas SWNTX can fluctuate. Secondly, the municipal fixed-income instruments held by SWTXX have a weighted average maturity of just 30.1 days, whereas SWNTX’s holdings have a weighted average maturity of 6.6 years.
Fidelity Tax-Exempt Money Market Fund (FMOXX)
There’s a catch with some municipal money market funds if you’re a high-net-worth investor: the alternative minimum tax (AMT). This is a parallel tax system designed to ensure that high-income earners pay a minimum level of tax, by disallowing certain deductions and exemptions that would otherwise reduce their tax liability. This can limit the effectiveness of a municipal money market fund.
If you’re in a high-income bracket, you might need a specialized municipal money market fund that holds securities screened to be exempt from AMT, such as FMOXX. This fund currently pays a 2.9% seven-day SEC yield, which according to Fidelity converts to 4.9% on a tax-equivalent basis. Like many Fidelity funds, FMOXX has no minimum required investment, but does charge a higher 0.42% expense ratio.
[SEE: 9 of the Best Bond ETFs to Buy Now.]
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7 Best Money Market Funds to Buy for 2024 originally appeared on usnews.com
Update 09/03/24: This story was previously published at an earlier date and has been updated with new information.
