2023 might be remembered as the year that the money market fund came back en vogue. After years of loose Federal Reserve monetary policy that kept interest rates pegged at zero, money market funds were seen as dead money by many investors.
No more: At today’s rates, the best money market mutual funds offer competitive yields and, importantly, a refuge from a volatile stock market. And these benefits should make them useful to investors in what should be a volatile 2024.
March 2023 saw the second- and third-largest bank failures in U.S. history, raising some uncomfortable questions about the safety of our savings. And this is where money market funds really shine. Checking and savings accounts are only insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). If your bank fails and you have deposits higher than that amount, your savings are not guaranteed. You become a general creditor along with everyone else.
But in the case of money market funds, you don’t hold cash. You hold a diversified basket of high-quality “cash equivalents” like short-term U.S. government Treasury bills or corporate commercial paper. And those assets belong to the money market mutual fund and its investors, not the manager, so if the manager of the fund gets into financial trouble, you don’t have to fight for your assets in bankruptcy court.
Today, we’re going to take a look at some of the best money market funds to earn a solid return while also steering clear of both stock market volatility and the risks of bank failure.
Disclaimer: This article does not constitute individualized investment advice. These funds appear for your consideration and not as investment recommendations. Act at your own discretion.
What Is a Money Market Fund?
A money market fund, or a money market mutual fund, is an open-ended mutual fund that invests in extremely short-term debt investments such as U.S. government T-bills, commercial paper (short-term debt issued by companies), repurchase agreements, or other high-quality, low-risk debt investments with a very short maturity. (Maturity is how long it takes before the principal on the debt must be repaid.)
Under current rules, any assets the money market fund holds should have a maturity of under 13 months, and the portfolio’s weighted average maturity should be 60 days or less. This keeps the funds liquid (easily converted into cash) and eliminates interest-rate risk—in other words, the risk that a spike in market interest rates will cause the value of the portfolio to fall.
Just be aware that in a few extreme cases, selling your shares might be costly or impossible. Most fund providers have boilerplate warnings explaining that they might charge you a fee, or suspend your ability to sell shares, if the fund’s liquidity falls below certain minimums on account of market conditions or other factors.
Money market funds are somewhat unique among mutual funds in that they specifically target a net asset value of $1 per share. Any earnings that cause the net asset value to go higher than $1 get distributed as dividends. This means that, unless you reinvest your dividends, the value of your money market mutual fund will not grow over time.
There are different types of money market funds. Thus, the best money market funds for one investor might be different from the best choice for another.
Let’s walk through some of those differences:
- A Treasury money market fund invests purely in U.S. Treasury securities or in repo agreements collateralized by treasury securities. There are no bank or corporate securities. If absolute safety is your primary consideration, this is going to be your best option.
- A government money market fund is slightly different. While it will generally hold government securities like a Treasury money market fund, a government money market fund can also hold government agency debt such as Fannie Mae or Freddie Mac securities. This inclusion of both government and agency securities makes government money market funds, in theory, slightly less secure than a pure Treasury money market fund. That’s because agency bonds are not explicitly guaranteed by the U.S. Treasury.
- Prime money market funds have a little more flexibility. In addition to government and agency securities, they can also hold corporate commercial paper, certificates of deposit (CDs), and other private short-term securities. Of course, this added flexibility and generally slightly higher yield comes at the expense of slightly higher credit risk.
- Most money market funds are fully taxable, but municipal money market funds are generally exempt from federal income tax. “Muni” money market funds invest in short-term securities issued by state or local governments. These can be further divided into national and even single-state municipal money market funds.
Finally, note that money market funds are different from money market accounts. A money market fund is a mutual fund, whereas a money market account (MMA) is a form of bank account.
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Why Invest in Money Market Mutual Funds?
You have a lot of options for your cash these days, and money market funds can play an important role. So let’s cover when a money market mutual fund might make sense.
To start, remember that money market funds are liquid, generally giving you access to your funds within 24 hours. But they’re still savings vehicles, and they’re really not designed to be used for day-to-day expenses like checking accounts. So, think of a money market fund as a nice place to park cash that you might need sometime in the near future.
The most direct competition for money market funds would be savings accounts or money market accounts offered by a bank or credit union. In each of these cases, your funds earn interest while remaining liquid and generally free of interest-rate risk. As a general rule, money market funds will offer slightly higher interest rates than bank products, though that can change based on market conditions.
There are differences, however, that go beyond raw interest rates.
Savings accounts and money market accounts offered by a bank or credited union will generally be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. So long as your account remains below that threshold, you can’t lose money.
Money market mutual funds are not protected by the Federal Deposit Insurance Corporation. Though you generally have minimal credit risk, it is possible to lose money in a money market mutual fund, particularly if it holds corporate commercial paper or other non-government securities.
But here’s where it gets interesting.
2023 made it clear how fragile our banking system can be. In cases where you have more than $250,000 to park, a money market fund—and in particular, one that invests in government and agency securities—will be safer than a bank savings product (where you’re limited to $250,000 in protection) because the money market fund’s assets are held separate from those of the manager or sponsor. Effectively, even if the fund’s management company goes bankrupt, it doesn’t mean the fund does.
If your bank fails like Silicon Valley Bank and your account balance is over $250,000, you have to hope and pray the government decides to bend the rules and come to your rescue. Because otherwise, you’re in line with everyone else fighting for the scraps in bankruptcy court.
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Our Favorite Money Market Funds
Today, we’re going to cover some of the best money market funds for 2024. But first, an important note: Availability will vary by broker. It’s common for a major brokerage house like Fidelity or Charles Schwab to limit availability mostly to their own in-house money market funds.
That’s perfectly fine. So long as you understand the basics and know what to look for, you can generally find a comparable fund at your respective broker.
Schwab U.S. Treasury Money Fund (SNSXX)
- Assets under management: $31.6 billion
- Minimum initial investment: $0
- 7-day SEC yield: 4.8%*
- Expense ratio: 0.34%, or $34 per year for every $10,000 invested
Let’s start with safety. If you are concerned about potential bank failures or troubles in the financial sector, it makes sense to stick to only the safest money market funds. And few are going to be safer than the Schwab U.S. Treasury Money Fund (SNSXX).
SNSXX owns a portfolio of Treasury securities backed by the full faith and credit of the U.S. government. That’s it. It owns no corporate or agency securities, and it doesn’t trade in repo agreements or derivatives.
This is literally as safe as money market funds get.
The weighted average maturity of its holdings is just 46.5 days, meaning you have virtually no interest-rate risk. The fund has no minimum investment. And perhaps most importantly, its yield is a competitive 4.8% as I write this.
If your IRA or 401(k) is held at Charles Schwab, the Schwab U.S. Treasury Money Fund could be an excellent option to park the cash you want to keep safe.
* 7-day SEC yield reflects the annualized daily income distributions made over the previous seven days. This is a standard measure for money market funds.
Learn more about SNSXX at the Schwab provider site.
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Schwab Municipal Money Fund – Investor Shares (SWTXX)
- Assets under management: $4.0 billion
- Minimum initial investment: $0
- 7-day SEC yield: 3.2%
- Expense ratio: 0.34%, or $34 per year for every $10,000 invested
If you find yourself in a high tax bracket, the Schwab Municipal Money Fund – Investor Shares (SWTXX) is a potentially good option. Its current tax-free yield is 3.2%, but this is equivalent to a 5.47% yield if you’re in the 37% tax bracket and pay the 3.8% Medicare surcharge.
SWTXX holds a diverse basket of municipal securities spanning the 50 states and Washington, D.C., and the weighted average maturity of its holdings is just 28.2 days, reducing interest-rate risk to effectively zero. This fund also has no minimum investment.
As a general rule, a municipal money market fund will only make sense if you are in a high tax bracket and tax minimization is a priority. Most investors will enjoy a higher return, even after taxes, in good, old-fashioned taxable money market funds.
Learn more about SWTXX at the Schwab provider site.
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Fidelity Government Money Market Fund (SPAXX)
- Assets under management: $310.9 billion
- Minimum initial investment: $0
- 7-day SEC yield: 4.7%
- Expense ratio: 0.42%, or $42 per year for every $10,000 invested
For an example of a more expansive government money market fund, consider the Fidelity Government Money Market Fund (SPAXX). Unlike the Schwab U.S. Treasury Money Fund, this Fidelity money market fund can buy more than just U.S. Treasury securities. About 40% of its portfolio is invested in repo agreements backed by Treasury securities, with most of the rest in fixed-rate and floating-rate agency securities (e.g., Fannie Mae and Freddie Mac securities).
There is ever so slightly more credit risk in a “government” money market fund as opposed to a “treasury” money market fund, so keep that in mind. But your risk of loss in a government fund is still exceedingly small.
This Fidelity fund has a weighted average maturity of just 27.0 days and sports a current yield of roughly 5.0%. If you hold your brokerage accounts at Fidelity, this is a worthy option for your idle cash.
Many brokerage accounts will actually sweep idle cash into their money market funds so you’re still earning interest even if you don’t have all of your funds invested.
Learn more about SPAXX at the Fidelity provider site.
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Vanguard Treasury Money Market Fund (VUSXX)
- Assets under management: $79.9 billion
- Minimum initial investment: $3,000
- 7-day SEC yield: 5.1%
- Expense ratio: 0.09%, or $9 per year for every $10,000 invested
Vanguard has a well-deserved reputation for offering some of the lowest fees in the industry. And remember, a dollar saved in fees is a dollar that goes straight to your returns. You might not notice as much in an equity mutual fund, where the differences in fees can get lost in the noise of market volatility. But in a money market fund, where the differences with the competition are measured in basis points (a basis point is one one-hundredth of a percentage point), every little bit counts.
Consider the Vanguard Treasury Money Market Fund (VUSXX). The Vanguard fund has an expense ratio of just 0.09%, the lowest of the money market funds covered here. And those lower fees contribute to its exceptionally high yield of 5.1%.
VUSXX is a Treasury money market fund, invested nearly 99% in Treasury securities with the rest split between other U.S. government obligations and repurchase agreements backed by Treasury securities. Its weighted average maturity is just 31.0 days. The minimum investment, at $3,000, is a little higher than that of the other funds reviewed in this article, but it’s far from onerous.
If your broker gives you access to Vanguard funds, you’ll be hard pressed to do better than this one.
Learn more about VUSXX at the Vanguard provider site.
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Vanguard Municipal Money Market Fund (VMSXX)
- Assets under management: $17.5 billion
- Minimum initial investment: $3,000
- 7-day SEC yield: 3.5%
- Expense ratio: 0.15%, or $15 per year for every $10,000 invested
As another tax-free option for investors in high brackets, consider the Vanguard Municipal Money Market Fund (VMSXX). This fund sports a portfolio of state and local government securities. Its weighted average maturity is an exceptionally low 13 days. And like most Vanguard funds, its minimum investment is just $3,000.
VMSXX sports a current yield of 3.5%, which is 100% free of federal income tax. This is equivalent to a 5.90% taxable yield if you are in the highest federal tax bracket and pay the 3.8% Medicare surcharge.
Given that VUSXX’s current 5.1% yield is slightly lower than VMSXX’s tax-equivalent yield of 5.90%, right now, it will make sense for most investors to buy VMSXX option—if they’re using a taxable brokerage account, that is. If you’re using an IRA or other tax-advantaged account, however, you’re better off with VUSXX.
Learn more about VMSXX at the Vanguard provider site.
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