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.

Liquidity means that investors can get in and out of the fund with ease making the fund ideal for investors looking for a relatively safe place to park money while earning as much interest as possible in the meantime.

The USAA Money Market Fund (USAXX) is offered by the United Services Automobile Association (USAA) in partnership with Victory Capital. The fund offers low expenses for investors and a low initial deposit of $1,000. On the downside, the fund has a history of providing low yields similar to bank savings accounts. It also does not come with the security of the Federal Deposit Insurance Corporation (FDIC).

Key Takeaways

  • 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.
  • The USAXX is offered through Victory Capital, following the acquisition of USAA investments in 2019.
  • The USAA Money Market Fund has an initial $1,000 minimum investment or a $50 monthly recurring deposit.
  • The fund's holdings had an extremely short weighted average maturity of just more than two days
  • Between the fund's inception in 1981 and 2020, it returned an average of 4.2% per year.
  • The fund's interest rate was near zero—.01%— as of Dec. 31, 2020, but still provides protection in an uncertain economic environment.

Fund Summary

The USAA Money Market Fund requires an initial investment of $1,000. This requirement is reduced to zero for investors who agree to automatic deposits of $50 or more per month. The fund carried an annual expense ratio of 0.62% as of December 31, 2020. The objectives of the fund are to earn interest income, preserve capital, and maintain liquidity by investing in short-term investments of less than one year.

The fund was offered through USAA Investments to members of the military and their immediate families, but is now offered and serviced through Victory Capital, which acquired USAA Investments in 2019.

Fund Holdings

The fund's holdings had an extremely short weighted average maturity of just 2.35 days. A short-term debt usually pays lower interest than a comparable long-term bond. However, short-term obligations tend to be less sensitive to interest rate changes and are more liquid than longer-term holdings. The holdings typically include the following characteristics; minimal credit risk, instruments issued by a money market fund, or are a U.S. government security that's guaranteed by the issuer.

Some of the bond holdings might be foreign or domestic securities, including floating-rate notes (FRNs). These notes pay an adjustable interest rate based on a benchmark, such as the London Interbank Offered Rate (LIBOR). As of Dec. 31, 2020, the USAA Money Market Fund had a portfolio allocation of 76% in cash, 12.39% in corporate bonds, 6.87% in U.S. Treasury bills, and 4.11% in municipal notes.

Fund Performance

Between the fund's inception in 1981 and 2020, it returned an average of 4.20% per year. As of Dec. 31, 2020, the fund paid a 30-Day SEC Yield of .01%.

Investors should not expect to earn a lot of money with this fund, at least not until prevailing interest rates rebound substantially.

Protection from Uncertainty

Although money market funds tend to pay less interest as interest rates decline, they can still provide 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 noted that interest rates can rise again in the future and money market funds are typically chosen for their liquidity and safety.

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 may offer 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.