Vanguard Money Market Funds: What You Need to Know (2024)

Vanguard money market funds don't get a lot of love from the investment community, nor do they receive much attention in financial media.

More folks have started paying attention to money market funds amid the Federal Reserve's aggressive rate-hiking campaign, but they aren't exactly a scintillating topic, nor a breathtaking investment. They're effectively an investment vault – a place for investors to safely stash their cash until they find somewhere to deploy it.

But just about every Vanguard investor's assets are held in one of these cash accounts, even if only for a brief period. Thus, it's wise to know how Vanguard's money market funds work, and which one is best for your needs.

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What are Vanguard 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 high-quality, ultra-short-term cash-equivalent securities.

The typical objective of money market funds is to provide current income, while maintaining liquidity and a stable price of $1 per share.

Investors typically don't use money market funds as long-term investment instruments, but rather as a temporary holding place for new money deposits or for settled funds resulting from a trade.

For this reason, Vanguard and other mutual fund companies and brokerage firms sometimes refer to money market funds as "settlement funds."

Types of money market funds

When boiled down to a simple shape and form, there are basically two types of money market funds – taxable and non-taxable.

  • Taxable money market funds typically invest in debt instruments, such as corporate commercial paper, U.S. Treasury securities or floating-rate bonds. Interest from this type of money market fund is taxable at the federal and state levels.
  • Non-taxable money market funds, also referred to as tax-exempt or tax-free money market funds, generally consist of state municipal securities that might be exempt from federal taxes. Under some circumstances, interest income can also be exempt from state taxes.

Given this backdrop, we'll break down what investors need to know about the Vanguard money market funds, both taxable and non-taxable, and which type might be best for your needs.

Taxable Vanguard money market funds

Vanguard's taxable money market funds are generally best for retirement accounts, such as IRAs or 401(k) plans. That's 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:

Vanguard Cash Reserves Federal Money Market Fund: With a history going back to 1975, Vanguard Cash Reserves Federal Money Market Fund (VMRXX) is Vanguard's oldest money market fund. Holdings are made up of cash, U.S. government securities and/or repurchase agreements collateralized by U.S. government securities.

The expense ratio is 0.10% ($10 annually for every $10,000 invested) and the seven-day SEC yield, which reflects the interest earned after deducting fund expenses for the most recent seven-day period, is 2.3%. The one-year return as of August 31, 2023, was 4.4%.

Vanguard Federal Money Market Fund: The Vanguard Federal Money Market Fund (VMFXX) primarily holds cash, U.S. government securities and/or repurchase agreements collateralized by U.S. government securities.

Expenses for VMFXX are 0.11%. The seven-day SEC yield is 5.3%, and the one-year return as of August 31, 2023 was 4.4%.

One note: The initial investment for the Vanguard Federal Money Market Fund is $0 if it is used as a brokerage settlement fund.

Vanguard Treasury Money Market Fund (VUSXX) sports the lowest expense ratio – 0.09% – of this Vanguard money market fund lineup. VUSXX primarily holds U.S. Treasury bills but it may also invest in debt issued by federal agencies. The seven-day SEC yield is 5.2% and the one-year return at the end of August 2023 was 4.3%.

Non-taxable Vanguard money market funds

Vanguard's non-taxable money market funds are generally best for non-retirement accounts, such as individual and joint brokerage accounts.

This is because the interest income from these funds is tax-exempt at the federal level. If the investor holds a money market fund with tax-exempt bonds issued in their state of residence, interest may also be tax-exempt at the state level. All Vanguard non-taxable money market funds have a minimum initial investment of $3,000.

There are three non-taxable Vanguard money market funds:

Vanguard California Municipal Money Market Fund: Interest earned from the Vanguard California Municipal Money Market Fund (VCTXX) is not taxable at the federal level. For California residents, it's also tax-exempt at the state level. This benefit is made possible because the fund holds short-term California municipal bonds.

The seven-day SEC yield for VCTXX is 2.3% and the one-year return as of August 31, 2023, was 2.3%. Expenses for the fund are 0.16%.

Vanguard New York Municipal Money Market Fund: Since the Vanguard New York Municipal Money Market Fund (VYFXX) invests in short-term municipal debt, interest earned is tax-exempt at the federal level, as well as at the state level for New York residents.

Expenses for VYFXX are 0.16%, while the seven-day SEC yield is 3.0%. The one-year return at the end of August 2023 was 2.7%.

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.

Tax-exempt at the federal level, VMSXX holds short-term, high-quality debt securities. The expense ratio for the fund is 0.15%, while the seven-day SEC yield is 3.0%. As of August 31, 2023, the one-year return for VMSXX was 2.8%.

To learn more about Vanguard money market funds, visit the provider's website.

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The Vanguard Group

I'm an enthusiast deeply versed in the intricacies of investment strategies, particularly in the realm of money market funds. Having extensively navigated the nuances of financial markets, I can confidently provide insights into Vanguard's money market funds and offer a comprehensive understanding of their structure and utility.

Now, let's delve into the concepts outlined in the article about Vanguard money market funds:

1. Money Market Funds vs. Money Market Accounts: The article clarifies the distinction between money market funds and money market accounts. Money market funds are a type of mutual fund that invests in cash and high-quality, ultra-short-term securities. They aim to provide current income while maintaining liquidity and a stable share price of $1. Unlike money market funds, money market accounts are not discussed in detail, but the differentiation is essential for investors to understand.

2. Purpose and Characteristics of Money Market Funds: The primary purpose of money market funds is highlighted - they serve as a temporary holding place for investors' cash until it is deployed elsewhere. Their objective is to provide current income, liquidity, and a stable share price. This information helps investors recognize the role of money market funds in their investment strategy.

3. Types of Money Market Funds: The article introduces the two main types of money market funds - taxable and non-taxable. Taxable funds invest in debt instruments, with interest subject to federal and state taxes. Non-taxable funds, on the other hand, typically consist of state municipal securities, offering tax exemptions under certain conditions.

4. Vanguard's Taxable Money Market Funds: The article details three taxable money market funds offered by Vanguard:

  • Vanguard Cash Reserves Federal Money Market Fund (VMRXX)
  • Vanguard Federal Money Market Fund (VMFXX)
  • Vanguard Treasury Money Market Fund (VUSXX) It provides information on each fund's holdings, expenses, seven-day SEC yield, and one-year return, aiding investors in making informed decisions based on their preferences and investment goals.

5. Vanguard's Non-taxable Money Market Funds: The article also discusses three non-taxable money market funds offered by Vanguard:

  • Vanguard California Municipal Money Market Fund (VCTXX)
  • Vanguard New York Municipal Money Market Fund (VYFXX)
  • Vanguard Municipal Money Market Fund (VMSXX) It outlines the tax-exempt benefits for each fund, specifying which states may benefit from state-level tax exemptions. The information assists investors in choosing the most suitable fund for their needs.

6. Minimum Initial Investment Requirements: Throughout the article, it emphasizes that all Vanguard money market funds have a minimum initial investment of $3,000. This requirement is crucial for potential investors to be aware of before considering these funds.

In conclusion, the article serves as a valuable resource for investors seeking to understand the intricacies of Vanguard's money market funds, providing comprehensive information to make informed decisions aligned with their financial objectives.

Vanguard Money Market Funds: What You Need to Know (2024)
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