The American Funds U.S. Government Money Market Fund ("AFAXX") is American Funds' lone money market fund offering. Launched on May 1, 2009, the fund was known as the American Funds Money Market Fund prior to April 1, 2016. In response to changes to Securities & Exchange Commission (SEC) rules governing money market funds, the fund reorganized itself to meet the requirements of a U.S. government money market fund, and adopted the current name.
Money market mutual funds are generally considered one of the safest investment products available to investors. While they don't hold the Federal Deposit Insurance Corp. (FDIC) protection that bank products do, most money market funds put their assets in short-term, safe investments to maintain a steady $1 per share price. AFAXX had total assets of $17.7 billion, as of August, 2016.
Money market funds are designed to provide investors with a dividend yield in exchange for their investments. However, the low interest rate environment has made delivering enticing yields a challenge for fund providers. The U.S. Government Money Market Fund paid no yield, as of April 22, 2016.
Fund providers charge management fees to operate the fund, and these expenses get deducted from the yields of the portfolios' holdings. Many money market funds have operated at a loss during several years of zero-interest rate policy. Despite the 25 basis-point rate hike in December 2015, many funds have chosen to not increase their yields to begin recouping some of their lost revenues.
The U.S. Government Money Market Fund's zero yield is a result of the fund's expenses outweighing its returns. As the Federal Reserve adjusts the target Fed Funds rate upward, issuers will likely begin raising the interest rates offered on their own notes. As this occurs, yields on money market funds will tend to rise, as well.
Money market securities are rated by the major ratings agencies, such as Standard & Poor's (S&P) and Moody's. The highest-rated securities are given a first-tier rating. Given the U.S. Government Money Market Fund's focus on high-grade government securities, the fund had 100% of its assets invested in first-tier securities, as of March 31, 2016. It has a weighted average maturity of 49 days.
AFAXX has its entire portfolio invested in a combination of U.S. treasury bills, government agency securities and cash. As of March 31, 2016, the fund had 69% of its assets in government agency notes from issuers such as Federal Home Loan Mortgage Corp. (FHLMC), 29% of its assets dedicated to short-term Treasuries and the remaining 2% of assets invested in cash.
Fees and Minimums
As of April 12, 2016, AFAXX paid a dividend yield of 0%. Part of the reason for the fund's non-existent yield is its 0.08% expense ratio, which is far more expensive than the Lipper U.S. Government Money Market Funds Average of 0.11%. The fund requires a minimum initial investment of $1000 for most account types.
Is the Fund Worth It?
Individuals looking for a money market fund that focuses on government securities can likely find options with a much lower cost structure. The traditional money market fund that invests in a combination of both government securities and corporate issues may also make more sense. The corporate notes inside of money market funds may not carry the backing of the full faith and credit of the government, but these funds also invest primarily in first-tier securities, making the chances of losing money on a money market fund investment very low.
Given the plethora of money market fund options available that charge less in fees and offer higher yields, AFAXX is a less-than-ideal choice for most investors.