Money market funds don’t outperform indexes like the S&P 500 during the good times in the stock market, but they can help shield you from substantial losses during downturns. These funds maintain a mostly steady price point while delivering high yields for their investors.
These funds cater to investors who want more stability and less risk. Investors get to enjoy higher returns than traditional savings accounts with high liquidity, as it’s possible to access the cash in a money market fund quickly.
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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 is the cost of doing business with a managed fund. Passively managed funds usually have lower expense ratios, while actively managed funds are more expensive.
Overall, short-term opportunities still exist for conservative investors in money market funds. Though interest rates are on a downswing, money market funds offer substantial yield with very little risk.
Historically elevated interest rates allow money market fund investors to realize higher cash flow from their investments. If equities falter during periods of higher rates or volatility, these funds can still deliver returns.
Money Market Fund Risks to Keep in Mind
Every investment has risks, such as changes to interest rates, inflation and the risk of default. These factors will influence the real return of your investments:
Interest Rate Risk
Money market funds are still generating cash flow for investors due to relatively elevated interest rates. However, the Federal Reserve cut rates by half a percentage point in September, the first reduction since March 2020, and the Fed is expected to announce another quarter-point cut on Nov. 7. A lower federal funds rate hurts 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,” says Allison Walsh, senior vice president, investment product strategist, head of ESG and corporate sustainability at Income Research + Management. “To lock in today’s higher rates, investors may want to consider extending duration beyond those offered by money markets.”
With more rate cuts potentially on the way, it may indeed be more valuable to lock in a good rate. However, securing a rate for a prolonged period of time comes at a cost. 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 silently impacts the real returns of your investments. If a fund yields 3% but inflation is at 2%, then your real return is only 1%. That’s before taxes, which will apply to money market funds. Taxation on distributions varies with many factors, but any interest income is treated as ordinary income.
Some money market funds can produce negative real returns after adjusting for inflation and taxes. Stocks have a better chance of outperforming inflation, especially during bullish economic cycles. 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 because 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 | Expense Ratio | Minimum Investment | 7-Day SEC Yield as of Nov. 4 |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | $3,000 | 4.7% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.09% | $3,000 | 4.7% |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 0.16% | $3,000 | 3.1% |
| Vanguard California Municipal Money Market Fund (VCTXX) | 0.16% | $3,000 | 2.6% |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.15% | $3,000 | 3.2% |
Vanguard Federal Money Market Fund (VMFXX)
The Vanguard Federal Money Market Fund has been around since 1981, has a 0.11% expense ratio and requires a $3,000 minimum investment. Investors right now enjoy a seven-day SEC yield of 4.7%, and the actively managed fund is also up by 4.5% year to date as of Nov. 4.
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 249 total holdings with an average maturity of 38 days. VMFXX closed out October with $322 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.
Vanguard Treasury Money Market Fund (VUSXX)
The Vanguard Treasury Money Market Fund also requires a $3,000 minimum investment to get started, and it also has a year-to-date return of 4.5%. Its seven-day SEC yield stands at 4.7%, and its 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 96.1% invested in U.S. Treasury bills and 3.9% in U.S. government obligations.
The fund has 36 holdings with an average maturity of 38 days. VUSXX prioritizes high cash flow and liquidity, and that strategy has attracted more than $83 billion in assets.
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 3.1% seven-day SEC yield as of Nov. 4.
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 293 holdings with an average maturity of 15 days. VYFXX has $3.3 billion in total net assets and is on a monthly distribution schedule.
Vanguard California Municipal Money Market Fund (VCTXX)
This actively managed fund is a California resident’s equivalent of VYFXX. It seeks to invest at least 80% of its assets in high-quality, short-term California municipal securities that are exempt from federal and state income taxes. Right now, all of its funds are invested in those types of securities.
VCTXX has a 0.16% expense ratio and a 2.6% seven-day SEC yield as of Nov. 4. The fund requires a $3,000 minimum investment to get started. VCTXX has 220 holdings with an average maturity of 14 days.
Investors have poured $3.7 billion into the fund and reap monthly distributions from VCTXX in return.
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 has a 0.15% expense ratio and a 3.2% seven-day SEC yield. You’ll have to deposit 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 $18 billion in total assets that are spread across 903 holdings. Securities in the fund have an average maturity of 15 days.
Returns haven’t been the highest, at 2.8% year to date as of Nov. 4, but like any money market fund, VMSXX offers more stability during economic slowdowns. For some investors, that provides some peace of mind in today’s unpredictable market.
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5 Best Vanguard Money Market Funds originally appeared on usnews.com
Update 11/05/24: This story was previously published at an earlier date and has been updated with new information.
