Some funds, such as Allspring Money Market Fund, Goldman Sachs Investor Money Market Fund and JPMorgan Liquid Assets Money Market Fund, are already offering returns close to 4% or more.
This compares to an average payout of 3% for a high yield online savings account. Although it’s the highest in at least five years, banks haven’t exactly kept pace with the Fed’s interest rate hikes since May.
This is because the rates offered by banks are ultimately at their discretion and influenced by factors other than Fed moves. The biggest banks are still teeming with pandemic cash and so have barely budged from what they pay to depositors in their savings accounts. (The average for all banks was 0.24% as of Nov. 21, according to the Federal Deposit Insurance Corp., but if you’re doing a bank, say, Wells Fargo or Chase, you’re lucky if you get 0, 02%.)
Online banks are more eager for customer deposits and have therefore been more responsive in passing on Fed rate hikes to their customers. Yet, since money market funds invest primarily in Treasuries, their yields tend to move in lockstep with the Fed rate. “Money funds always give the market what the Fed gives them,” said Pete Crane, founder of Crane Data.
Money market funds are often used to protect cash that might be needed in the short term, such as for a mortgage down payment or an emergency fund, or as a place to hold between portfolio investments. Given the funds’ attractive returns, more investors should take a look.
Some already are. Money market funds have been reeling from assets since April, hitting $4.72 trillion this month — near the record high of $4.79 trillion in May 2020, according to the Investment Company Institute.
Remember though that money market funds are not synonymous with bank accounts. They don’t have FDIC insurance, and there have been instances where assets have fallen below $1 per share, or “broken the ball”, and customers have not been able to get all of their money back. .
This is less of an issue now after regulatory reforms enacted following the fallout from the 2008 financial crisis. In addition, most money market funds only hold government bonds that are backed by full trust and the credit of the US government. In the past, distressed funds invested in short-term corporate bonds.
Still, investors for whom security is the number one concern should stick to money market funds that invest only in government securities, not corporate bonds. The name of the fund will usually state what it invests in, but check the fund documents to be sure.
Of course, other cash-type investments also offer high returns (relatively speaking) – looking at you sexy short-term Treasuries – but it can be harder to access your cash than with funds from the Money Market. You can schedule and stagger short-term purchases of a certain duration of treasury bills on TreasuryDirect.gov, but it takes a little more legwork than buying shares of money market funds directly.
It’s a similar story with certificates of deposit – they offer potentially higher returns, but investors must commit to locking in their money for a set period of time.
For those whose brokerage firms offer money market funds alongside their accounts as a place to “sweep” excess cash, beware. These funds rarely have the best returns, said Ken Tumin, founder of DepositAccounts.com. If you have a large balance, you should consider switching to another money market fund that offers a larger payout.
Keep an eye on the fees, though. Unlike a bank account or treasury bill, money market funds charge for managing your money. When returns were extremely low, many money market funds waived most of their fees, charging an average of 0.08% instead of the usual 0.27%, according to data from Crane. But with higher returns, fees have returned to normal levels.
Finally, if you’re in a high tax bracket, consider money market funds that invest in municipal bonds, which provide interest that could be exempt from federal or state income taxes. Their yields aren’t as high as those of other money market funds right now, but Crane says it’s only a matter of time before they rebound. They tend to see big exits at the end of the year and on April 15th, so when prices fall, returns will head north.
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• Forget what you learned about investing: Merryn Somerset Webb
• Generation Z is having a much harder time than Generation Y: Allison Schrager
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
More stories like this are available at bloomberg.com/opinion