A money market fund is a safer alternative to stock investing and often pays more than holding money in a traditional bank account. These funds pool investors' money to purchase low-risk and highly liquid securities, such as Treasury bills and commercial paper. That makes them ideal for investors looking for a relatively safe place to park money while earning as much interest as possible in the meantime. However, the Federal Reserve's response to the coronavirus crisis pushed interest rates to near zero in 2020.
The USAA Money Market Fund (USAXX) is offered by the United Services Automobile Association (USAA). It has many holdings concentrated in the banking, education, and hospitality industries. The fund offers low fees for investors who maintain minimum monthly balances or agree to regular monthly deposits. On the downside, the fund has a history of providing yields similar to bank savings accounts. It also does not come with the security of Federal Deposit Insurance Corporation (FDIC) coverage.
- A money market fund, such as USAXX, is a safer alternative to stock investing and often pays more than holding money in a traditional bank account.
- There is no monthly fee for the USAA Money Market Fund, as long as a $500 minimum balance or $50 recurring deposit is maintained.
- The fund's holdings had an extremely short weighted average maturity of just 13 days, and most of them had adjustable interest rates.
- Between the fund's inception in 1981 and 2020, it returned an average of 4.28% per year.
- The interest rate offered was near zero in May 2020, but the fund still provides substantial protection in an uncertain economic environment.
The USAA Money Market Fund requires an initial investment of $500. This requirement is reduced to zero for investors who agree to automatic deposits of $50 or more per month. There is no monthly fee as long as a $500 minimum balance or $50 recurring deposit is maintained. Otherwise, the fund carried an annual expense ratio of 0.62% as of December 2019. The fund is offered by USAA Investments. This Texas-based company provides financial services to members of the military and their immediate families. Victory Capital acquired USAA Investments in 2019.
The fund's holdings had an extremely short weighted average maturity of just 13 days. A short-term debt usually pays lower interest than a comparable long-term bond. However, short-term obligations are safer because they are much less sensitive to interest rate changes. Most of the bond holdings of the USAA Money Market Fund are floating-rate notes (FRNs). These notes pay an adjustable interest rate based on a benchmark, such as the London Interbank Offered Rate (LIBOR).
The USAA Money Market Fund invested 29% of its funds in banks, 5% in government bonds, and 4% in capital markets as of March 2020. It also has 3% in investment banks and brokerages, 2% in real estate, and the remainder in other investments.
Between the fund's inception in 1981 and 2020, it returned an average of 4.28% per year. Even during the 21st century, the fund's returns remained strong for many years. $10,000 invested in the fund in January 2006 would have been worth over $11,000 by the beginning of 2009. However, the fund was mostly flat from 2010 through 2015, paying 0.01% per year. A $10,000 investment in January 2010 would gain less than $10 by 2017. After a brief return to higher rates after 2017, returns were back near zero in 2020.
Investors should not expect to make money with this fund, at least not until prevailing interest rates rebound substantially.
Protection from Uncertainty
The USAA Money Market Fund seemed to become less useful to investors as interest rates declined, but the money market still provides protection from uncertainty. When money market funds were developed in the 1970s and 1980s, interest rates were high and increasing. In that environment, the money market offered interest rates that went up with market interest rates.
In the aftermath of the 2008 financial crisis, rates fell to near zero and remained persistently low. That led many to question the value of money market funds. However, it should be remembered that their interest rates will go up automatically if market rates rise due to inflation. That is a substantial benefit during uncertain times.
The Bottom Line
The USAA Money Market Fund provides a reasonably safe alternative to cash or a savings account for investors looking for a place to park money. At the very least, the fund offers dramatically better principal protection than the stock market. However, investors concerned with yield but wanting to preserve safety might be better off seeking an online savings account. Many of them, such as those offered by Ally Financial (ALLY), paid substantially more in April 2020.