As the Federal Reserve continues to increase interest rates in 2018, investors are starting to eye money market mutual funds again. The yields of money market mutual funds are largely dependent on the interest rate environment, meaning their yields will likely rise as interest rates rise. The Vanguard Prime Money Market Fund (VMMXX) is one of the money market mutual funds that has seen its yield rise in 2018, with a distribution yield that has risen from 1.12% in September 2017 to 2.11% during the same month in 2018.
Money Market Funds and SEC Regulations
This type of fund was originally designed to provide current income, preserve the shareholder's principal by maintaining a fixed $1.00 share price and offer daily liquidity. That changed in 2008 during the financial crisis, when investors pulled billions of dollars from the Reserve Primary Fund. That took the money market fund's share price from $1.00 to $0.97.
In 2016, the Securities and Exchange Commission (SEC) rolled out regulations to prevent these type of situations. Retail money market funds, which most investors buy, will continue to maintain fixed $1.00 share prices, but the funds may face redemption restrictions and liquidity fees during times of financial duress, such as the 2008–2009 financial crisis. Investors had still been wary to put their assets in money market funds, especially in low-interest rate environments. Now that it's changing again, here's a look at the Vanguard Prime Money Market Fund.
Overview of the Vanguard Prime Money Market Fund
The Vanguard Prime Money Market Fund Investor Shares is a conservative investment option offered by The Vanguard Group, one of the world's largest equity and fixed income managers. VMMXX is a taxable money market account designed for the retail investor. The fund launched in 1975 and holds total assets of $110.4 billion as of Sept. 30, 2018. The portfolio contains 363 securities with an average maturity of 45 days. The holdings include U.S. Treasury bills (T-bills) with a 23.1% portfolio weighting, U.S. government obligations at 10.7%, U.S. commercial paper at 2.2%, certificates of deposit (CDs) at 6.4%, and Yankee/foreign obligations at 57%. The minimum investment is $3,000, and the expense ratio is 0.16%.
Suitability of the Vanguard Prime Money Market Fund Investor Shares
This fund is suitable for conservative investors whose tolerance for risk is low or who may need quick access to the funds on a daily basis. Investors with short-term investment horizons of one to three years may find VMMXX a suitable choice to keep their cash earning competitive rates. Investors with longer-term investment horizons may use VMMXX for the cash allocation of their long-term investment portfolios.
In the absence of a financial crisis, the risk of loss of principal is minimal. The fund is set to continue to mirror the short-term interest rates available in the U.S. economic environment, and investors can expect to see the fund increase its yield when short-term interest rates begin to rise. VMMXX, like all mutual fund money market funds, is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC). Investors concerned about the lack of insurance may wish to consider a money market fund account offered by a bank, since the FDIC insures those accounts up to $250,000.