VAnguard money market funds are not highly regarded by the investment community and do not receive much attention in the financial media.
Money market funds are not exactly a glittering subject, nor a breathtaking investment. They are, in fact, an investment vault – a place where investors can safely store their money (and earn a minimum return) until they find a place to deploy it.
But pretty much all of Investor Vanguard’s assets are held in one of these cash accounts, even if only for a brief period. So, it is wise to know how Vanguard money market funds work and which one is best for your needs.
What are money market funds?
Not to be confused with a money market account, a money market fund is a type of mutual fund that holds cash and securities equivalent to high quality ultra-short term cash.
The typical goal of money market funds is to provide current income, while maintaining liquidity and a stable price of $ 1 per share.
Investors generally do not use money market funds as long-term investment instruments, but rather as a temporary holding place for new deposits of money or for settled funds resulting from a transaction.
For this reason, Vanguard and other mutual fund and brokerage firms sometimes refer to money market funds as “settlement funds”.
Types of money market funds
In summary, there are basically two types of money market funds: taxable and non-taxable.
- Taxable money market funds Usually invest in debt securities, such as corporate commercial paper, US Treasury securities, or floating rate bonds. Interest on this type of money market fund is taxable at the federal and state levels.
- Tax-free money market funds, also called tax-exempt or tax-exempt money market funds, generally consist of municipal state securities that may be exempt from federal taxes. In certain circumstances, interest income may also be exempt from state taxes.
Against this background, we’ll detail what investors need to know about Vanguard money market funds, both taxable and non-taxable, and which type might be best suited to your needs.
Vanguard Money Market Fund: taxable
Vanguard’s taxable money market funds are generally best for retirement accounts, such as IRAs or 401 (k) plans. This is because their taxable status is not applicable to tax-deferred accounts. All Vanguard taxable money market funds have a minimum initial investment of $ 3,000.
There are three taxable Vanguard Money Market Funds:
1. Vanguard Cash Reserves Federal Money Market Fund
With a history dating back to 1975, Vanguard Cash Reserves Federal Money Market Fund (VMMXX) is Vanguard’s oldest money market fund. The holdings consist of cash, US government securities, and / or repurchase agreements backed by US government securities.
The expense ratio is 0.16% ($ 16 per year for every $ 10,000 invested) and the seven-day SEC return, which reflects interest earned after deducting fund expenses for the seven-day period. most recent, is 0.01%. The one-year return as of March 31 was 0.14%.
The VMMXX is closed to new investors, but the Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX), which has a lower expense ratio of 0.10%, is open to new shareholders.
2. Vanguard Federal Money Market Fund
Vanguard Federal Money Market Fund (VMFXX) primarily holds cash, US government securities and / or repurchase agreements backed by US government securities.
The expense for VMFXX is 0.11%. The seven-day SEC yield is 0.01% and the one-year yield at March 31 was 0.11%.
3. Vanguard Treasury Money Market Fund
Vanguard Treasury Money Market Fund (VUSXX) has the lowest expense ratio – 0.09% – of this line of money market funds.
VUSXX primarily holds US Treasuries but may also invest in debt securities issued by federal agencies. The seven-day SEC yield is 0.01% and the one-year yield at the end of the first quarter was 0.12%.
Vanguard Money Market Fund: non-taxable
Vanguard’s tax-free money market funds are generally best suited for non-retirement accounts, such as individual and joint brokerage accounts.
Indeed, the interest income of these funds is exempt from tax at the federal level. If the investor holds a money market fund with tax-exempt bonds issued in their state of residence, the interest may also be tax-exempt at the state level. All Vanguard tax-free money market funds have a minimum initial investment of $ 3,000.
There are three tax-free Vanguard Money Market Funds:
1. Vanguard California Municipal Money Market Fund
Interest earned on Vanguard California Municipal Money Market Fund (VCTXX) is not taxable at the federal level. For residents of California, it is also exempt from tax at the state level. This advantage is made possible because the fund holds short-term California municipal bonds.
The seven-day SEC return for the VCTXX is 0.01% and the one-year return at March 31 was 0.11%. The fund’s expenses are 0.16%.
2. Vanguard New York Municipal Money Market Fund
Since Vanguard New York Municipal Money Market Fund (VYFXX) invests in short-term municipal debt, interest earned is exempt from tax at the federal level, as well as at the state level for New York residents.
The expense for VYFXX is 0.16%, while the seven-day SEC return is 0.01%. The year-over-year return at the end of the first quarter was 0.12%.
3. Vanguard Municipal Money Market Fund
For investors residing in states other than California or New York, the Vanguard Municipal Money Market Fund (VMSXX) is a good choice for a money market fund in a taxable brokerage account.
Federally tax exempt, VMSXX holds high quality short term debt securities. The fund’s expense ratio is 0.15%, while the seven-day SEC yield is 0.01%. As of March 31, VMSXX’s one-year return was 0.15%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.