Money Market Funds Attract $300 Billion in Four Weeks, Fastest Pace Since 2020

Money market funds attracted more than $300 billion in four weeks, the fastest pace of inflows since 2020 as investors sought safety from turmoil in the banking industry.

Assets under management (AUM) reached a record $5.1 trillion, according to Bank of America analysts, who also noted that the flows may be the next potential bubble and said prior surges into the asset class have coincided with the end of Fed tightening cycles leading up to recessions in 2008 and 2020.

Money market funds are growing in popularity as investors opt for safer wagers amid recent market volatility. Some 30% of investors surveyed by Investopedia say they’re investing more in them because of recent events. 

Some advantages of money market funds are that they can offer diversification and high liquidity with a relatively low risk profile. However, it’s worth noting they have historically had low returns due to their relative safety.

Over the past decade, record low interest rates depressed the returns of money market funds and boosted riskier assets such as small-cap and technology stocks. The Fidelity Money Market Fund (SPRXX) returned 0.76% annually over the past ten years, compared with the the S&P 500’s 9.5% return.

However, the Federal Reserve’s interest rate hikes are turning the tides in favor of money markets. Fidelity’s SPRXX returned 0.69% in just the first two months of this year, generating a seven-day yield of almost 4.5%. Meanwhile, stocks have wavered in the face of monetary tightening by the Fed, along with recent turmoil in the banking sector caused by the collapse of Silicon Valley Bank (SVB) and Signature Bank.

Money market funds are conventionally used to preserve capital and generate income, and can offer an attractive option to park cash and wait out market volatility.