A day after Vanguard announced the liquidation of two municipal money market funds, it has converted its Prime Money Market to a Cash Reserves Federal Money Market fund, making it more accessible to retail investors.
(Related: Vanguard to Liquidate 2 Money Market Funds)
The Vanguard Prime Money Market Fund change, announced in late August, drops the minimum for more than 1 million Prime fund investors from $5 million to $3,000 and the fees they pay from 16 basis points to 10 basis points.
The changes being made by Vanguard are just the latest in a series of shifts affecting money market funds more broadly due to near-zero short-term rates in the U.S., which the Federal Reserve expects to maintain through the end of 2023.
Yields are so low that fund companies have to subsidize costs or close funds, according to Daniel Wiener, chairman of Adviser Investments and senior editor of The Independent Adviser for Vanguard Investors. He describes the situation as “a perfect storm that will continue to lead to fund closures.”
Indeed, in August Fidelity Investments liquidated two institutional prime money market funds — Fidelity Investments Money Market Prime Money Market Portfolio and Fidelity Investments Money Market Prime Reserves Portfolio — and Northern Trust liquidated its Northern Institutional Prime Obligations Portfolio in July.
Fidelity said it was seeing “declining investor interest in institutional prime money market funds and increased investor interest in government and retail money market funds” due to “regulatory changes enacted several years ago requiring institutional prime money market funds to transact at a floating or variable net asset value (NAV), which allowed fund boards the option to temporarily impose redemption restrictions during times of market stress.”
Vanguard Chief Investment Officer Greg Davis said, “The rewards of even the most conservatively managed prime funds are no longer worth the risk.”
The situation in the muni market space is different from that of prime funds.