Are you simply looking for where to park your cash? Or do you have an emergency fund set up? If you are looking for ways to squeeze some extra returns out of your cash, but are looking at options other than a simple chequing account, money market funds may be of interest to you. Selectively and carefully, there are some options to invest your funds in to the financial markets. But which one to choose? What are the best Vanguard money market funds in the US?
The quick answer is that VMFXX or VUSXX will be the best most investors if you are investing in an account that is not taxed such as 401k. VMSXX is the better choice on an after-tax basis, if you have to invest in a taxable account and you are at the higher end of the marginal tax-brackets.
Let’s dive in to what I think would be the four best money market funds from Vanguard for your cash in the US.
Which Vanguard money market funds are best?
We’ve analyzed four different funds in this article. Let’s take a deeper look.
VMFXX – Vanguard Federal Money Market Fund
This fund is considered one of the ‘safest’ of all Vanguard has to offer, and it’s tied firmly to US government securities. Over 99% of investments go into cash assets, meaning you can expect high liquidity – ideal for emergency funds where you may wish to remove your cash at short notice. It ranks a ‘one’ on Vanguard’s risk scale, meaning there’s little to worry about when it comes to potential loss.
VMFXX currently has a dividend yield of 5.29% (based on 7-day SEC yield). When comparing VMFXX vs savings accounts, the dividend yield is about the same as the current interest rate on offer on many high-yield savings accounts, which are currently in the 4.5% to 5% range. Obviously unlike a savings account, your invested principal can also fluctuate in value slightly over time.
Vanguard suggests that if you look at the total compound yield, it is slightly higher at 5.42%. The compound yield, which is not an industry standard term, measures the the dividend yield assuming you reinvested all the dividends received so far back in to VMFXX.
Note that unlike a savings account, VMFXX does not have an interest rate. Even though a standard savings account would be a comparison point for this fund, one should look at the dividend yield and not the interest rate on the VMFXX.
The dividend from VMFXX is paid on a monthly basis. The record date is the last working day of each month, and the funds will settle in your account a couple of days later. For individual investors, it means you can expect to see the funds in your account at the start of each month. If you chose the re-investment option, you will not get any cash.
The nice thing is that this fund has never had a negative return quarter, meaning your invested funds should retain their value at any given point of time. Note however that the minimum investment amount with this fund is $3,000.
Can you lose money with VMFXX? Anything is possible, but based on the securities that the fund invests in, I would say the odds are extremely low.
When it comes to returns, however, you may come up short. With a low-risk fund, you can generally expect lower returns. However this fund still provides somewhat better returns than a savings account. Sure, a CD could provide a higher interest rate, but then you’re stuck with your money being locked in for a specific period of time. A money market fund gives your a lower interest rate, but immediate access to your money.
VMFXX is a good starter fund for emergency money. The expense ratio on the fund is a minimal 0.11%. There is no purchase or redemption fee.
This fund is similar to VMFXX, but with a couple of important differences. VMRXX invests more than 25% of its assets in securities issued by companies in the financial services industry, which includes securities issued by certain government-sponsored enterprises. The fund therefore takes marginally more risk than VMFXX. This fund is still however classified as level 1 (out of 5) on Vanguard’s risk scale, so you do not have to lose sleep at night.
Secondly, it’s important to note that as VMRXX is an Admiral Shares branded fund, you cannot write checks on this fund.
The fund historically has produced slightly higher return than VMFXX, however the low interest rate environment over the last several years meant that both funds have generated very similar returns. If interest rates continue rising and do not head back to 0%, on a forward looking basis, you may be able to get a bit more return out of VMRXX compared to VMFXX.
Interestingly enough however when looking at the latest holdings of the fund, the top holdings in VMFXX and VMRXX are the same (or functionally similar), which means that these funds have converged over time.
The only item that stands out as being different is the the holdings maturity, which differs by roughly 20 days. For practical purposes, I would not call that a material difference though.
|US Govt Obligations
|US Treasury Bills
|Average Holdings Maturity
VMRXX 7-day yield is currently 5.29% and the compound yield is 5.42%. Comparing VMRXX vs savings accounts, the dividend yield on the VMRXX is higher at 5.30% (compounded yield of 5.43%) compared to the 4.5-5% offered by most savings accounts.
|7-day SEC yield
Just like VMFXX, the dividend from VMRXX is paid on a monthly basis. If you chose the re-investment option, you will not get any cash.
As with VMFXX, this fund has never had a negative return quarter, meaning your invested funds should retain their value at any given point of time. Can you lose money with VMRXX? Anything is possible, but based on the securities that the fund invests in, I would say the odds are extremely low.
Note again that the minimum investment amount with this fund is $3,000. The fund’s expense ratio is 0.10%. There is no purchase or redemption fee.
VUSXX – Vanguard Treasury Money Market Fund
Rounding out the list of US Treasury focused money market funds, we have the VUSXX. At a high level, the returns profile for the VUSXX closely correlates with that of VMFXX and VMRXX, so for most practical purposes, investors can be indifferent to which one they buy. However there are two key points to discuss here first when comparing these funds.
The first is the price. Money market funds are known for not “breaking the buck”, i.e. their price stays at $1 consistently. In the past, I have noted VUSXX being priced at $0.9998. Now obviously it’s only $0.0002 or 2/10,000th of a dollar away from the buck and is essentially a rounding error within a rounding error; and perhaps I’m being a bit neurotic here; but I find it odd that the fund is below $1. On the other hand the price of VMFXX is precisely $1.0000, whereas the VMRXX stock is $1.0001, and even VMSXX (discussed below) is at $1.0002.
The second piece is just a difference worth pointing out and I don’t have any concerns there. Let’s take a look at the holdings for VMFXX vs VUSXX.
|US Govt Obligations
|US Treasury Bills
|Average Holdings Maturity
The VUSXX has a higher duration and this the only possible explanation on why the share price can go below a buck. Other than though, the holdings are flawless and most of the money is invested directly in Treasury bills.
The underlying holdings are actually more secure than what VMFXX or VMRXX hold as both of those have securities issued by private organizations (mostly banks) whereas VUSXX has purely government securities.
VUSXX has mostly performed in line with VMFXX . Given it has a slightly higher duration, the marginal underperformance relative to VMFXX makes sense. On a going forward basis as interest rates stabilize and the yield curve steepens again, it’s likely that VUSXX will perform in-line or slightly better than VMFXX.
Finally, looking at the dividend yield and expense ratios, we see it’s almost the same.
|7-day SEC yield
The compound yield for the fund is 5.43%. Note again that the minimum investment amount with this fund is $3,000. There is no purchase or redemption fee.
VMSXX – Vanguard Municipal Money Market Fund
For those who have to hold their emergency fund in a taxable account, VMSXX might actually be the better option as it has a tax-exempt status. While this fund has generated lower returns than the VMRXX, VMFXX, and VUSXX, it is actually a winner on an after-tax basis. So I would urge you to not simply exclude this fund based on just the initial examination. See the discussion on taxes in the section below.
As everyone’s tax situation is unique, it is difficult to provide a general recommendation about whether this would be the best option for you specifically. Nevertheless not having to pay any tax on the distributions from this fund makes it a compelling choice for those who may need it.
|VMSXX Total Returns
As the name suggests, the fund mainly holds municipal securities which have a tax-exempt status. The yield from the fund is dependent on the current interest rate environment, so you can look forward to slightly higher returns as the Fed raises interest rates.
VMSXX has $18 billion in assets and currently has a dividend yield of 4.22% (7-day SEC yield), which makes it the smallest and lowest yielding fund of all four. VMSXX does not have an interest rate. The dividend yield is the correct metric to use here.
As with the other funds, the fund has not experienced a negative quarter in the last decade. The minimum investment is $3,000 and the fund’s expense ratio is slightly higher at 0.15%. There is no purchase or redemption fee.
Taxes on Money Market Funds
Unless you’re investing in the money market funds in a tax-deferred or tax-exempt account like a 401k or a Roth, income generated from money market funds will be subject to taxes. These taxes can significantly impact an investor’s net returns.
Let’s look at the returns for VMFXX vs VMRXX vs VUSXX with VMSXX after taxes on the distributions. These returns are calculated assuming the highest marginal tax rate. If you are in a lower marginal bracket, the tax impact will be lower.
As I mentioned above, VMSXX’s tax-exempt status means that it’s before-tax and after-tax returns are the same. However the hit to the returns for both VMRXX and VMFXX is clearly visible here.
It’s important to keep in mind that even interest earned in savings accounts will be subject to income taxes, so when comparing returns, please remember to compare after-tax returns on money market funds with after-tax interest on savings accounts.
Amongst the funds discussed here, VMSXX would be best for those investors who are in the higher marginal tax brackets and have to hold these funds in a fully taxable account. Otherwise you’re better off with
Why should I invest my emergency fund?
The main goal of investing an emergency fund in the markets is to generate a higher return on the cash than the interest in a bank account. Money market funds typically provide a higher rate of interest than a savings account, while providing the same nearly-instantaneous access to your money when you need it, in other words these are great examples of liquid investments with minimal risk to your portfolio. Sure, you could get a higher interest rate in long-term CD, but your money is locked in and you would pay a penalty to access it prior to maturity.
However to many, the idea of investing an emergency fund at all may seem fairly risky. My emergency fund is mostly invested in cash, savings term deposits, and some physical gold and silver.
Prior to investing, always consider your circumstances. If your particular line of work doesn’t provide you with stable income, or you’re just getting started building up your emergency fund, it’s probably not worth taking the investment route just yet. What’s more, you need to be shrewd about what you’re going to use your emergency fund on. Will lives depend on this money? If so, it’s probably not a good idea to put it all at the mercy of your markets.
What’s more, if you’re in the process of paying off debt at a high rate of interest, you should focus on clearing that before gambling your emergency money on funds and portfolios!
Before looking into any fund with Vanguard, it’s important to remember the precise purpose of an emergency fund. This isn’t money you’re going to want to play around with – this is a fund that you’re going to need access to at short notice in the event of an emergency – as it says in the name!
Emergency funds are ideal for falling back on for your healthcare needs, or if your car needs to go in for a repair, if you need to take your dog to the vet, etc. Regardless, before you even start looking for funds, remember you’re not in it to make money right away!
If anything, making money on an emergency fund should be a perk.
However, if you are willing to accept a modicum of risk when investing your emergency fund – and you already have a savings pot established – it might be a good idea to look at diversification.
Asset Allocation Questionnaire
I have earlier presented a simple asset allocation framework and it is appropriate to apply that framework here to determine how best to allocate an emergency fund. It’s a good exercise and will help frame our thinking:
- Time Horizon: Indeterminate. By nature, one cannot predict when an emergency occurs, so while it could take many years before you need this cash, when an emergency happens, you need the cash immediately.
- Risk Tolerance: None to Low. We want all our money to be there when we need it. Our fund can’t be down 10% or 20% when we need it. We can live with a maximum downside of 5%.
- Return requirement: At a minimum, keep pace with inflation so the fund does not lose its spending power.
This analysis shows that we want our money to be available at short notice (in the order of a few days) and it should all be there! At the same time, this pot of money is not required to attain the maximum returns possible. We therefore need to find the best way to invest money and keep it liquid.
This means that at the most basic level, an emergency fund covering up to 3 months of expenses should almost always be invested in a cash or cash-like product such as money-market funds. Once we have that covered, we could potentially examine other avenues such as investing in alternative assets like short to medium-term treasury funds or in precious metals.
Providing you’re careful about the funds you choose, you can avoid losing serious money. Crucially, it would be well advised to steer clear of funds holding any equity, long-term bonds, or non-investment grade debt – as there’s never any guarantee that the portfolio will hold its value at any given point in time.
Should I invest my emergency fund with Vanguard?
Vanguard’s reputation in money management is well-regarded – they are amongst the longest-standing investment experts still operating today. That said, this doesn’t confirm whether or not keeping your emergency fund in a risky portfolio is the best option to take.
My advice would be to try investing a portion of your emergency fund a little at a time. This is especially worthwhile if you’re completely new to the markets. Vanguard’s funds and ETFs are diversified enough to protect what little money you invest to a degree, but you have to consider if it’s worth going through the hassle to generate slightly higher return compared to a simple bank savings account.
The focus with saving an emergency fund shouldn’t be to make money, rather to safeguard it – but if the opportunity arises for you to generate income on the back of your savings, you should never pass on it.
Investing can be highly lucrative, but it’s not worth doing so – with Vanguard or any other provider – until you can be sure that you have the financial safety net to protect your interests in case things head south. The last thing you’ll want to do is place all of your money in one fund, only for it to experience a dip and result in you losing that safety net.
Be sure to research and review multiple banks and savings options before leaping into the financial markets. While it may appear exciting, there’s no need to gamble your emergency pot away unless you can be sure the dividends or returns far outweigh the risks.
Before You Go…
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Is Vanguard VMFXX FDIC insured?
No, VMFXX is not insured by the Federal Deposit Insurance Corporation. The FDIC only insures bank deposits, such as checking or savings accounts. As VMFXX is a money market investment fund, it is not insured by the FDIC. However the fund is registered with the SEC, which gives you some assurance that it is ultimately a regulated product. Additionally, as VMFXX invests mainly in US government liquid securities, your odds of a total loss of capital are very low.
Is Vanguard VMRXX FDIC insured?
No, VMRXX is not insured by the Federal Deposit Insurance Corporation. The FDIC only insures bank deposits, such as checking or savings accounts. As VMRXX is a money market investment fund, it is not insured by the FDIC. However the fund is registered with the SEC, which gives you some assurance that it is ultimately a regulated product.
When does VMRXX pay dividends?
The dividend from VMRXX is paid on a monthly basis. The record date is the last working day of each month, and the funds will settle in to your account a couple of days letter. For individual investors, it means you can expect to see the funds in your account at the start of each month. Of course if you chose the re-investment option, you will not get any cash.
What is the difference between VMFXX and VMMXX?
VMMXX is now closed.
Is VMRXX closed to new investors?
No, it is open to new investors.
Is VMFXX a good investment?
If your objective is to preserve capital while earning a high interest rate (paid out in the form of a dividend), then VMFXX is a good investment choice. Just remember these dividends will be taxable, so you should ideally own the fund in a tax-free or tax-deferred account.
by Brianna Johnson
Brianna Johnson, a Miami-based finance veteran, is a wealth advisor for high net-worth families. She loves to write and to share her knowledge. For PFF, she writes in-depth articles on finance and investments that help readers get unique insights. See more.