After 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 seeing increased inflows from investors looking to preserve their capital.
An aggressive pace of interest rate hikes from the Federal Reserve drove bond yields higher, with many bond funds suffering unprecedented losses as a result, as bond prices fall as 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 a great investment 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 highly liquid securities with the objective of preserving your capital as well as providing income at prevailing market rates,” he says.
Compared to stock and bond funds, money market funds are considered much safer, but not completely risk-free. “The risk associated with money funds is very low, because the SEC only allows holdings of securities with high credit quality and short maturities,” says Smith.
“However, investors should understand that money market funds’ share prices can dip below their net asset value of $1 and have historically done so a few times in very volatile markets,” he says. This is called “breaking the buck” and happened to some funds during the 2008 financial crisis.
Furthermore, unlike bank products such as savings accounts, certificates of deposit, or money market accounts, money market funds are not insured by the Federal Deposit Insurance Corporation, or FDIC. However, they offer more liquidity and can be held in brokerage accounts.
Here is a list of the best money market funds to buy in 2023:
Vanguard Federal Money Market Fund (VMFXX)
A popular money market fund with more than $223 billion in assets under management, or AUM, is VMFXX. This fund has lasted rather long, debuting in 1981 and surviving several market crashes and recessions. Currently, VMFXX pays a seven-day SEC yield of 4.23% and an expense ratio of 0.11%.
“I like VMFXX for its low fees versus many other money market funds that not only have low yields, but also high expense ratios near 0.4%,” says Michael Ashley Shulman, 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 attractive to investors in higher tax brackets looking for better tax efficiency from their money market funds.
All of VMSXX’s holdings are securities exempt from federal income tax. While the seven-day SEC yield is below VMFXX at 3%, after-tax net returns can vary depending on an investor’s income bracket. VMSXX has a 0.15% expense ratio and no minimum investment requirement.
Fidelity Money Market Fund (SPRXX)
Investors who like Fidelity’s platform and a suite of funds can choose 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 $6.5 billion in AUM. Currently, the fund pays a seven-day SEC yield of 4.14%. However, it has a significantly higher expense ratio than VMFXX at 0.42%, but carries no minimum investment requirements.
T. Rowe Price US Treasury Money Fund (PRTXX)
PRTXX differentiates itself from other money market funds through a heavy focus on US Treasuries backed by the full faith and credit of the federal government. These instruments are highly liquid, have virtually no default risk, and have 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 fund’s Class I charges a lower expense ratio of 0.23%.
JPMorgan Prime Money Market Fund (VMVXX)
Another popular option among money market investors is VMVXX, which consists of a mix of U.S. government and agency securities, floating rate notes, commercial paper, certificates of deposit, asset-backed securities, and repurchase agreements.
Specifically, 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 such as agency debt, repurchase agreements, and treasury bills. Like many money market funds, INAXX pays distributions monthly.
Currently, INAXX pays a seven-day SEC yield of 4.06%. The fund has attracted approximately $3.8 billion in AUM, with an average expense ratio of 0.36% for 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 previous options, attracting only $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 very small minimum investment of $1,000.