Vanguard money market funds are famous for being an extremely low-cost option to grow our cash returns. By investing in extremely safe short-term assets such as U.S. Treasury bills, Vanguard money market funds provide investors with the option to earn a safe yield on cash with low expense ratios. As a result, Vanguard funds are some of the most popular places to park uninvested cash. Let’s review the different Vanguard funds and which ones are right for you.
Summary:
- Vanguard is famous for its money market funds that generate much higher yields than cash in a bank savings or checking account.
- Vanguard money market funds are easily bought and sold. There is a highly liquid market for these funds.
- Vanguard’s expense ratios are generally the lowest in the industry, compared to the fees of Fidelity, Schwab, and other brokerages.
- Vanguard manages over $550 billion in deposits across all its money market funds.
What Are Vanguard Money Market Funds?
The primary objective of money market funds is to offer investors and savers a means to safeguard cash while earning low-risk profits. Money market funds are one of many options to earn higher cash returns on Vanguard.
Vanguard has two types of money market funds: taxable government money market funds, and tax-exempt municipal money market funds.
Compared to the wide variety of funds from Fidelity and Schwab, Vanguard only offers 6 funds between these two categories.
Why Consider Vanguard Money Market Funds
Vanguard money market funds currently offer some of the highest money market yields. This is partially due to Vanguard’s low expense ratios.
VMFXX, the Vanguard Federal Money Market Fund, has a 7-day SEC yield of 5.27%. This yield is already net of a 0.11% expense ratio. Compare this to SPAXX from Fidelity, which charges an expense ratio of 0.42%, with a 7-day SEC yield of 4.95%. Vanguard’s comparable fund is paying over 30 basis points more.
In general, Vanguard money market funds will provide:
- Income and Market Leading Yields: Money market funds distribute monthly income and have the potential to earn you higher yields than what you’d earn from your bank. Because of a low expense ratio, Vanguard money market funds offer some of the industry’s highest yields.
- Liquidity: Vanguard money market funds are popular and can be easily sold and liquidated if you need access to cash. Liquidity is not accessible with cash stored in bank CDs or savings accounts.
- Stability: Vanguard money market funds are required to invest in short-maturity, low-risk investments, as required by SEC regulations. These funds are much less volatile compared to other types of investments.
Any uninvested cash in a Vanguard brokerage account is automatically invested into VMFXX.
Are Vanguard Money Market Funds Easy To Buy and Use?
Vanguard money market funds are easy to buy and use. Vanguard’s platform and website are user-friendly and allow investors to easily make transactions.
Vanguard money market funds have a minimum investment of $3,000, which is much higher than Fidelity or Schwab, which have a minimum investment of $1.
However, there is a loophole here. VMFXX, Vanguard’s Federal Money Market Fund, is Vanguard’s default “settlement fund”. This means when you deposit any cash into a brokerage account with Vanguard, even if the amount is less than $3,000, it will automatically be “swept” into VMFXX. As a result, you can deposit an amount less than $3,000 to a Vanguard brokerage account, and “buy” VMFXX that way.
If you need to purchase another investment, Vanguard will automatically liquidate enough VMFXX to provide the cash to purchase another security.
The Best and Most Popular Vanguard Money Market Funds
Vanguard offers six money market funds:
- Vanguard Federal Money Market Fund (VMFXX)
- Vanguard Cash Reserves Federal Money Market Fund (VMRXX)
- Vanguard Treasury Money Market Fund (VUSXX)
- Vanguard Municipal Money Market Fund (VMSXX)
- Vanguard California Municipal Money Market Fund (VCTXX)
- Vanguard New York Municipal Money Market Fund (VYFXX)
VMFXX, VMRXX, and VUSXX are all taxable government money market funds. VMFXX, as the default settlement fund, is the largest with around $260 billion in customer funds managed.
VMSXX, VCTXX, and VYFXX are all tax-exempt municipal money market funds. These funds are all exempt from federal income taxes.
All funds have a minimum investment of $3,000, except VMFXX, which has a deposit loophole as we mentioned.
VMFXX vs. VMRXX vs. VUSXX: Comparing Which Vanguard Government Money Market Fund is Best
VMFXX, VMRXX, and VUSXX are all popular money market funds. Let’s walk through the details of each, and when you should consider buying one over the other.
VMFXX (Vanguard Federal Money Market Fund) Overview
VMFXX is Vanguard’s default settlement fund. Any uninvested cash in your Vanguard account is automatically parked in this fund. As a result, it’s the largest of Vanguard’s three government money market funds, managing $260 billion. VMFXX’s expense ratio is currently 0.11%, with a 7-day SEC yield of 5.27%! Compare this to lower yields from Fidelity’s SPAXX or Schwab’s SNVXX, both competing government funds.
VMFXX must invest at least 99.5% of its total assets in cash, U.S. government securities, or repurchase agreements that are backed by those assets.
In 2022, 49% of VMFXX’s dividends were exempt from state income tax. Unfortunately, this state tax exemption did not apply to California, Connecticut, or New York residents.
How to Choose Between VMFXX vs. VUSXX or VMRXX?
VMFXX is the default position for your uninvested and idle cash. It’s the easiest choice if you don’t want to think too hard about which money market fund to choose and want a safe option to earn income on your cash.
VMRXX (Vanguard Cash Reserves Federal Money Market Fund) Overview
VMRXX is Vanguard’s second-largest fund, currently managing $110 billion. The expense ratio is 0.10%, with a 7-day SEC yield of 5.28%.
The major difference between VMRXX and VMFXX is that VMRXX invests 25% of its assets in securities issued by financial companies and other government enterprises (although those securities are all backed by cash and U.S. government securities).
Does this mean the VMRXX is technically a bit more risky? Yes, but in reality, VMFXX and VMRXX are more similar than different.
In 2022, 52% of VMRXX’s dividends were exempt from state income tax. Again, this state tax exemption sadly did not apply to California, Connecticut, or New York residents.
How to Choose VMRXX vs. VMFXX or VUSXX?
VMRXX used to be Vanguard’s prime money market fund. As a result, it’s supposed to offer a bit higher yield in addition to yield, with a lower expense ratio.
Practically speaking, VMRXX and VMFXX are more alike than not, and it’s not worth splitting hairs to decide which one to buy.
VUSXX (Vanguard Treasury Money Market Fund) Overview
VUSXX is the smallest of Vanguard’s taxable money market funds, with $50 billion managed, but it has some unique characteristics. It’s the only Vanguard fund to invest exclusively in U.S. Treasuries. VUSXX is 80% state-tax exempt for all investors, including California, Connecticut, or New York residents.
Its 7-day SEC yield is 5.28%, with an expense ratio of 0.09%.
How to Choose VUSXX vs. VMFXX or VMRXX?
VUSXX is safer than VMFXX since it only invests in U.S. Treasuries. The same applies to VUSXX vs. VMRXX. The VUSXX state tax exemption is also a big deal, especially if you’re in a high-tax state.
VMFXX and VMRXX only offer partial state tax exemption, with none for CA, CT, and NY residents.
VMSXX vs. VCTXX vs. VYFXX: Comparing Which Vanguard Municipal Money Market Fund is Best
These three funds from Vanguard are all tax-exempt money market funds. However, the degree of tax exemption depends on which state you live in. Let’s walk through each fund.
VMSXX (Vanguard Municipal Money Market Fund) Overview
VMSXX is Vanguard’s primary municipal money market fund. It invests in short-term high-quality municipal securities from different states. The current 7-day yield is 3.53%.
This fund is exempt from federal income taxes, and a small percentage is also exempt from state income taxes.
How to Choose VMSXX vs. VCTXX or VYFXX?
You should consider buying VMSXX if you live outside of California or New York and want to buy a Vanguard municipal money market fund.
If you compare VMSXX vs. VMFXX, note that VMFXX is the default settlement in a Vanguard brokerage account. So any cash you deposit into a Vanguard brokerage will automatically be swept into VMFXX with no minimum investment.
VMSXX is a municipal money market fund and will be most accessible for residents living outside of California and New York. If you live in a low-tax state and your total after-tax return is still higher than VMFXX yield, you can consider buying VMSXX.
VCTXX (Vanguard California Municipal Money Market Fund) Overview
VCTXX is intended for California residents only. It invests at least 80% of its assets in many high-quality, short-term California municipal securities. The current 7-day yield for VCTXX is 3.11%.
This fund is entirely exempt from federal and state income taxes for California residents.
How to Choose VCTXX vs. VMSXX or VYFXX?
Buy VCTXX vs. VMSXX or VYFXX if you live in California and want to buy a Vanguard California municipal money market fund.
VYFXX (Vanguard New York Municipal Money Market Fund) Overview
VYFXX is intended for New York residents only. It invests at least 80% of its assets in a variety of high-quality, short-term California municipal securities. The current 7-day yield for VCTXX is 3.45%.
This fund is entirely exempt from federal and state income taxes for New York residents.
How to Choose VYFXX vs. VMSXX or VCTXX?
VYFXX is a good option for New York residents wanting to buy a Vanguard New York municipal money market fund.
Are Vanguard Money Market Funds Safe?
Vanguard money market funds are intended to not lose value. As funds that invest in extremely safe, high-quality securities, Vanguard money market funds preserve capital while generating income. Vanguard money market funds are very low-risk investments.
Because Vanguard money market funds are investment products, they are not FDIC-insured.
However, money market funds and other securities held in a Vanguard brokerage account are eligible for SIPC coverage. Securities in your brokerage account, including Vanguard money market funds, are protected up to $500,000.
Is It Easy to Sell My Money Market Funds on Vanguard?
Yes, it’s very easy to sell your money market funds on Vanguard. Vanguard provides an online platform where you can easily manage and sell your investments, including money market funds. You can log in to your Vanguard account, navigate to the “Sell funds” page, and choose the money market fund you want to sell. From there, you can follow the prompts to complete the sale transaction. Additionally, Vanguard offers customer support to assist you with any questions or concerns you may have during the process.
I’m Not Sure About Money Market Funds, What Else Can I Buy on Vanguard?
If you’re not ready to buy money market funds on Vanguard, you can consider buying Treasury bills or brokered CDs. Callable brokered CDs on Vanguard frequently have higher yields than its money market funds.
FAQ
What are Vanguard money market funds?
Vanguard money market funds are mutual funds that invest in short-term, high-quality cash investments, such as U.S. Treasury bills and commercial paper. These funds seek to provide current income while maintaining liquidity.
Are Vanguard money market funds insured or guaranteed?
While Vanguard money market funds invest in high-quality cash investments, they are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC).
How is the 7-day SEC yield calculated for a money market fund?
The 7-day SEC yield for a money market fund is calculated by annualizing the fund’s current earnings and dividing by the average net asset value (NAV) over a week. It’s a standardized measure of the fund’s yield that allows investors to compare different money market funds.
Can Vanguard money market funds be used as a cash investment option?
Yes, Vanguard money market funds are frequently used as a cash investment option. These funds are designed to provide current income while maintaining liquidity, making them suitable for investors looking for a stable place to park their cash.
