Following a brutal year for bond funds last year, money market funds are now popular again in 2023. After languishing for years in a perpetually low-yield environment, these funds are now seeing increased inflows from investors seeking to preserve their capital.
An aggressive pace of interest rate hikes from the Federal Reserve sent bond yields soaring, with many bond funds suffering unprecedented losses as a result, since bond prices fall when their yields rise, and vice versa.
Now, many of these investors are turning to money market funds to take advantage of higher rates.
“Money market mutual funds are great investments for short-term, conservative investors,” says Nafis Smith, senior portfolio manager and head of taxable money markets at Vanguard. “This is because they typically invest in very liquid securities with the objective of preserving your capital while also providing income at prevailing market rates,” he says.
Compared to stock and bond funds, money market funds are considered very safe, but not entirely risk-free. “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 permitted to be held,” says Smith.
“However, investors should understand the share price of a money market fund can dip below its net asset value of $1 and have historically done so a few times during extremely volatile markets”, he says. This is called “breaking the buck” and happened to a few funds during the 2008 financial crisis.
Moreover, unlike bank products like savings accounts, certificates of deposit, or money market accounts, money market funds are not insured by the Federal Deposit Insurance Corp., or FDIC. However, they do offer greater liquidity and can be held in brokerage accounts.
Here’s a list of the best money market funds to buy in 2023:
- Vanguard Federal Money Market Fund (ticker: VMFXX)
- Vanguard Municipal Money Market Fund (VMSXX)
- Fidelity Money Market Fund (SPRXX)
- T. Rowe Price U.S. Treasury Money Fund (PRTXX)
- JPMorgan Prime Money Market Fund (VMVXX)
- Invesco Government Money Market Fund (INAXX)
- BlackRock Summit Cash Reserves Fund (MSAXX)
Vanguard Federal Money Market Fund (VMFXX)
A popular money market fund with over $223 billion in assets under management, or AUM, is VMFXX. This fund is rather long-lived, debuting in 1981 and surviving multiple market crashes and recessions. Currently, VMFXX pays a seven-day SEC yield of 4.23% and costs an expense ratio of 0.11%.
“I like VMFXX for its low fees versus many other money market funds that not only have lower yields, but also higher expense ratios closer to 0.4%,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. The fund requires a minimum investment of $3,000.
Vanguard Municipal Money Market Fund (VMSXX)
Another popular option from Vanguard is VMSXX, which debuted in 1980 and has since attracted $16.7 billion in assets under management. This fund is particularly alluring to investors in higher tax brackets looking for better tax efficiency from their money market fund.
All of VMSXX’s holdings are in securities exempt from federal income taxes. While the seven-day SEC yield is lower than VMFXX at 3%, the after-tax net return might be better depending on the investor’s income bracket. VMSXX has a 0.15% expense ratio and no minimum investment requirement.
Fidelity Money Market Fund (SPRXX)
Investors who favor Fidelity’s platform and suite of funds can opt for SPRXX. Like all money market funds, SPRXX targets a combination of liquidity, income potential and a stable $1 share price. It holds U.S. Treasury repurchase agreements, certificates of deposit and short-term commercial paper.
SPRXX has been around since 1989 and currently sports around $6.5 billion in AUM. Currently, the fund pays a seven-day SEC yield of 4.14%. However, it does have a significantly higher expense ratio than VMFXX at 0.42%, but carries no minimum investment requirements.
T. Rowe Price U.S. Treasury Money Fund (PRTXX)
PRTXX distinguishes itself from other money market funds via a heavy focus on U.S. Treasurys, which are backed by the full faith and credit of the federal government. These instruments are highly liquid, have virtually no default risk, and possess very low interest rate sensitivity.
Currently, PRTXX pays a seven-day SEC yield of 4.02% while charging an expense ratio of 0.31%. The fund has attracted AUM of $13.5 billion. The investor class of the fund requires a $2,500 minimum investment. For those with $500,000, the I class of the fund charges a lower expense ratio of 0.23%.
JPMorgan Prime Money Market Fund (VMVXX)
Another popular option among money market investors is VMVXX, which holds a mix of U.S. government and agency securities, floating rate notes, commercial paper, certificates of deposit, asset-backed securities and repurchase agreements.
Notably, VMVXX considers environmental, social and governance, or ESG, factors for its holdings. Since its inception in 1993, the fund has attracted $66.9 billion in AUM. VMVXX currently pays a seven-day SEC yield of 4.24%, charges an expense ratio of 0.5%, and requires a $1,000 minimum investment.
Invesco Government Money Market Fund (INAXX)
INAXX targets three objectives: current income, preservation of capital and daily liquidity. The fund achieves these objectives by investing in assets like agency debt, repurchase agreements and Treasury bills. Like many money market funds, INAXX pays out distributions on a monthly basis.
Currently, INAXX pays a seven-day SEC yield of 4.06%. The fund has attracted around $3.8 billion in AUM amid an average expense ratio of 0.36% for the investor class shares. The fund requires a minimum initial investment of $1,000 and $50 for subsequent purchases.
BlackRock Summit Cash Reserve Fund (MSAXX)
Like many money market funds, MSAXX seeks to maintain a stable $1 share price and daily liquidity by holding an assortment of U.S. Treasury bills, repurchase agreements and agency debt. Generally, the fund seeks to maintain a dollar-weighted average maturity of 60 days or less.
MSAXX is less popular than the previous choices, having attracted just $578 million in AUM. The fund currently pays a seven-day SEC yield of 3.73% and charges an expense ratio of 0.42%. However, it requires a fairly small minimum investment of $1,000.
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