You may have heard the adage that “bonds offer safety.” This principle is what underpins the popular “60/40” portfolio — 60% in stocks to provide returns, and 40% in bonds to dampen volatility.
But it’s worth reconsidering just how “safe” your chosen bond fund really is. A closer look might leave you alarmed.
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Take the Vanguard Total Bond Market Index Fund Admiral Shares (ticker: VBTLX) as an example. This popular, low-cost aggregate bond fund is designed to provide broad exposure to thousands of government Treasurys, mortgage-backed securities and investment-grade corporate bonds of varying maturities.
However, if you relied on VBTLX for safety of principal, it failed miserably in recent years. During the high-inflation, rising-rate environment of 2022, VBTLX experienced a drawdown of -18.1%, rivaling the decline seen in stocks. Why?
The fund’s portfolio carried significant interest rate risk. By holding bonds with longer maturities, it became more sensitive to rate hikes. As rates rose and bond yields followed, bond prices fell sharply, leading to substantial losses for VBTLX and most bond funds.
If your top priority is preserving capital, it’s worth considering money market funds instead. While technically a type of fixed-income investment, they focus on highly liquid, short-maturity securities, making them easier to trade and far less sensitive to interest rate changes.
Moreover, money market funds have a unique advantage: Their net asset value (NAV) per share is fixed at $1. Even during the bond market’s 2022 bear market, money market funds held their ground, protecting investors’ capital.
“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.
Most asset managers offer a lineup of money market funds, but for investors on Charles Schwab’s brokerage platform, there’s a broad selection available with low minimum investment requirements, no transaction fees and a flat 0.34% expense ratio across its investor-class funds.
Here are five of the best Charles Schwab money market funds to buy:
Fund | 7-day yield* |
Schwab Value Advantage Money Fund (SWVXX) | 4.19% |
Schwab Government Money Fund (SNVXX) | 4.07% |
Schwab U.S. Treasury Money Fund (SNSXX) | 4.05% |
Schwab New York Municipal Money Fund – Investor Shares (SWYXX) | 2.16% |
Schwab California Municipal Money Fund – Investor Shares (SWKXX) | 2.0% |
*All yields as of Jan. 23.
Schwab Value Advantage Money Fund (SWVXX)
One thing money market fund investors need to understand is that there are different types, each of which has investment restrictions. The broadest type are “prime” money market funds, which have discretion to own not only government securities like Treasurys and repurchase agreements, but also corporate-issued securities like promissory notes, commercial paper and certificates of deposit.
“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.” This Schwab prime money market fund currently pays a 4.19% seven-day SEC yield. This is a standardized measure of the average income paid out by a money market fund over the previous seven days, net of fee waivers.
Schwab Government Money Fund (SNVXX)
“While all money market funds are generally considered low-risk, government money market funds are viewed as the most conservative option,” says Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. “These funds must keep at least 99.5% of their assets in government securities or related repurchase agreements.” In short, they’re safer than prime funds but may yield a bit less.
Schwab’s flagship government money market fund is SNVXX. Unlike SWVXX, this fund does not hold any promissory notes, commercial paper or certificates of deposit. Instead, it is limited to only Treasurys and repurchase agreements. Compared to SWVXX, the credit risk is lower, but so is the seven-day SEC yield at 4.07%. Still, for risk-conscious investors this may be a worthwhile trade-off.
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Schwab U.S. Treasury Money Fund (SNSXX)
“For our multifamily office clients, we want a money market fund that is as safe as possible from disruption from pandemics, wars, strikes and other global macro events,” Schulman says. “In these cases, we often look to Treasury money market funds, which are considered flight-to-safety instruments and don’t have the spread-widening risk of corporate or foreign instruments.”
The Schwab money market fund for this role is SNSXX. Unlike SNVXX, SNSXX does not hold any repurchase agreements. This fund only holds Treasury bills, which are ultra-short-term fixed-income securities issued by the U.S. Treasury. They have minimal interest rate sensitivity and a very strong credit rating, with no counterparty risk like repurchase agreements. SNSXX pays a 4.05% seven-day SEC yield.
Schwab New York Municipal Money Fund – Investor Shares (SWYXX)
“If tax efficiency is your primary focus, consider investing in a municipal money market fund, where most earnings are typically free from federal taxes,” Schulman says. “These funds generally invest in debt securities from local and state entities, like city hospitals, state colleges, power companies and transit systems, so in addition to receiving tax-advantaged income, you will be doing a social good.”
High-income-bracket investors living in New York can potentially earn big tax savings with SWYXX. The distributions from this money market fund are exempt from both federal and state income tax. While the 2.16% seven-day SEC yield seems paltry, it is an incomplete figure. The correct income metric to know is the “tax-equivalent yield,” which investors can use various online calculators to figure out (your tax-equivalent yield will vary depending on your taxable income and where you reside).
Schwab California Municipal Money Fund – Investor Shares (SWKXX)
SWKXX exempts investors from state income tax, provided they reside in California, as it exclusively holds securities issued by the state and its various municipal agencies. This is especially beneficial for investors in high income brackets given that California has one of the highest personal income tax rates. As such, the 2% seven-day SEC yield of this fund should be meaningfully higher on a tax-equivalent basis for California residents.
For high-net-worth investors with at least $1 million in capital, SWKXX has an institutional variant, the Schwab AMT Tax-Free Money Fund — Ultra Shares (SCTXX). This version pays a higher 2.22% seven-day SEC yield because it charges a lower 0.19% expense ratio. For a $1 million investment, the difference in fees amounts to $1,900 a year versus $3,400 a year, which can compound favorably over time.
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5 Best Schwab Money Market Funds originally appeared on usnews.com
Update 01/24/25: This story was previously published at an earlier date and has been updated with new information.