A money market fund is a safe alternative to stock investing or holding money in a traditional bank savings account. These funds pool investors' money to purchase safe and highly liquid securities, such as Treasury notes (T-notes) and certificates of deposit (CDs). In a normal interest rate environment, money market funds offer higher interest rates than savings accounts and provide the same level of safety. This makes them ideal for investors looking for a safe place to park money they need to access in the near future but also seeking to earn as much interest possible in the meantime. With interest rates pushed to rock bottom in the wake of the Great Recession of 2007-2009, the yield difference between money market accounts and savings accounts has been squashed, in some cases to zero. Years later, it's still rare to find a money market account that paid even a full percentage point in yield.
The USAA Money Market Fund (USAXX), offered by the United Services Automobile Association (USAA), features 205 holdings, many of them 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. It provided strong growth until the interest rate drop in 2009. On the downside, the fund has a history of offering no better yields than most bank savings accounts, and it does not come with the security of Federal Deposit Insurance Corporation (FDIC) coverage.
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. There is no monthly fee as long as a $1,000 minimum balance or $50 recurring deposit is maintained. Otherwise, the fund carried an annual expense ratio of 0.63% as of October 2018. The fund is offered by USAA, a Texas-based company that provides financial services, including banking and insurance, to members of the military and their immediate families.
The fund's five largest holdings are all short-term debt securities from large banks. A short-term corporate bond pays lower interest than a comparable medium- or long-term bond but is much safer because it carries less interest rate sensitivity. Most of the bond holdings of the USAA Money Market Fund are floating-rate notes (FRNs) or those that pay an adjustable interest rate based on a benchmark, such as the LIBOR (London Interbank Offered Rate).
The USAA Money Market Fund holds short-term bonds from Bank of America Corporation (NYSE: BAC), JP Morgan Chase & Company (NYSE: JPM), Goldman Sachs Group, Inc. (NYSE: GS) and Citigroup, Inc. (NYSE: C).
Since the fund's inception in 1981, it has returned an average yield of 4.65%. Even during the 21st century, the fund's returns remained strong for many years. An amount of $10,000 invested in the fund in January 2006 would have been worth over $11,000 by the beginning of 2009. From 2009 to 2016, however, the fund was essentially flat, paying 0.01% per year. A $10,000 investment in January 2010 would be worth less than $10,100 in April 2016.
For investors looking for a place to park money they will need to access soon, the USAA Money Market Fund provides a safe alternative to cash or a bank savings account. At the very least, the fund, unlike the stock market, offers the security of principal protection. However, investors should not expect to make money with this fund, at least not until prevailing interest rates rebound substantially. Investors concerned with yield but wanting to preserve safety might be better off seeking an online savings account, such as those offered by Ally Financial (NYSE: ALLY), many of which pay 1% or more.