Money market funds allow investors to limit risk while earning an attractive yield.
A money market fund is a type of mutual fund that invests in debt securities, specifically those characterized by short maturities and minimal credit risk. A money market fund generates income with little to no capital appreciation, making it a low-risk, low-return investment.
The vehicle offers investors high liquidity with very low risk (albeit more risk than cash). Because money market funds are mutual funds, it’s important to note that they are not covered by the FDIC’s federal deposit insurance.
The overall return from a money market fund is dependent on current interest rates, making the interest rate policy of the Federal Reserve a key driver for yield.
The Vanguard Federal Money Market Fund (VMFXX), the JPMorgan Prime Money Market Fund (VMVXX), and the Invesco Government Money Market Fund (INAXX) are each yielding around 5% in the current environment.
The Fed’s recent rate hikes have brought the Fed funds rate to its highest level in over 20 years. According to Strategas ETF Research, the rapid hiking cycle coupled with the attractive yields currently offered by money market funds has led to a recent surge in interest in the vehicle.
Money market funds have grown tremendously in the past year, seeing one-year flows that dramatically exceed flows into both equity and fixed income ETFs. Over $1.1 trillion has moved into money market funds since October 12, 2022, according to Strategas ETF Research.
Notably, this marks the largest money market AUM change on both a net and percentage basis in the year following important equity market lows over the last 35 years, per Strategas ETF Research.
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