Maximizing Your Cash: A Guide to Money Market Funds and Cash-like Investments

When economic turmoil strikes, "Cash is king," as the saying goes. In the face of market volatility, investors often seek refuge in cash and cash-like assets. While some might envision stashing money under their mattresses, most opt for federally insured alternatives like high-yield savings accounts, certificates of deposit (CDs), or even money market funds, providing both security and a competitive yield.

Investors holding cash in a brokerage account have a way to preserve their capital while earning a competitive yield – investing in money market funds. These funds offer high liquidity, short-term securities, and the potential for income at prevailing market rates.

As we delve deeper into the world of cash management, it's clear that money market funds are becoming increasingly attractive in 2023, thanks to rising interest rates. "Money market rates surpassed the 4.5% mark in February 2023, whereas they were close to 0% at the start of 2022," says Nafis Smith, Principal and Head of Taxable Money Markets at Vanguard. This growth in rates provides investors the advantage of earning while they wait for the Federal Reserve to address inflation concerns.

Money market funds are renowned for their principal safety and low volatility. Regulated by the Securities and Exchange Commission (SEC), they are only permitted to hold securities with high credit quality and shorter maturities. Unlike bond funds, they don't lose value when interest rates rise. "These instruments have less than a 13-month maturity with a weighted average maturity of less than 60 days, so their short-term nature results in little volatility and risk of loss," says Vicki Eagleson Arndt, Principal and Founder of Eagleson Arndt Financial Advisors.

Nevertheless, it's important to note that money market funds aren't entirely risk-free. In times of severe market stress, these funds have failed. The most notable example is the "breaking of the buck" by the Reserve Primary Fund in 2008 when Lehman Brothers declared bankruptcy. In such a scenario, a money market fund's net asset value per share falls below $1.

Additionally, money market funds lack the same level of protection that high-yield savings accounts or CDs offer, as they are not backed by Federal Deposit Insurance Corp. (FDIC) insurance. However, post the Great Recession, the SEC made amendments to Rule 2a-7, significantly enhancing the resilience and safety of money market funds.

For investors looking to navigate the world of money market funds, we present a list of seven top money market mutual funds and some exchange-traded fund (ETF) equivalents for 2023:

1. Vanguard Federal Money Market Fund (VMFXX)

   • Expense Ratio: 0.11%

   • 7-Day SEC Yield (as of October 9): 5.3%

2. JPMorgan Prime Money Market Fund (VMVXX)

   • Expense Ratio: 0.50%

   • 7-Day SEC Yield (as of October 9): 5.2%

3. Vanguard Municipal Money Market Fund (VMSXX)

   • Expense Ratio: 0.15%

   • 7-Day SEC Yield (as of October 9): 3.4%

4. Invesco Government Money Market Fund (INAXX)

   • Expense Ratio: 0.32%

   • 7-Day SEC Yield (as of October 9): 4.9%

5. SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

   • Expense Ratio: 0.14%

   • 7-Day SEC Yield (as of October 9): 4.97%*

6. iShares 0-3 Month Treasury Bond ETF (SGOV)

   • Expense Ratio: 0.07%

   • 7-Day SEC Yield (as of October 9): 5.37%*

7. Invesco Short Term Treasury ETF (TBLL)

   • Expense Ratio: 0.08%

   • 7-Day SEC Yield (as of October 9): 5.22%*

(*30-day SEC yield)

For investors seeking high liquidity and the ability to trade throughout the day, cash-like ETFs are also considered. These ETFs may not be true money market funds, but they offer low volatility and minimal credit risk.

In uncertain economic times, the role of money market funds and cash-like investments becomes more crucial. As an informed investor, you have the option to safeguard your wealth, leverage current market conditions, and preserve your financial security.

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