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.
Vanguard cited the supply shortage of “certain types of municipal securities in Pennsylvania and New Jersey” for its decision to liquidate the funds, but Peter Crane, president of Crane Data, which monitors the money market and mutual fund and banks savings market, says the decision may have more to do with the nature of the muni money market universe — “the smallest and most expensive money market funds to run with limited audience” and Vanguard’s own structure.
“Vanguard doesn’t have the flexibility that other for-profit companies have in cross-subsidizing its products” because its funds are owned by their investors, says Crane. Other fund companies have the ability to waive fees for money market funds as a result of low yields and subsidize those fees with money earned from their other funds.
“It makes sense for Vanguard to get out of a less popular higher cost segment, like money market funds,” says Crane.
Other fund companies are also liquidating muni money market funds, including Federated Investors and Dreyfus, owned by BNY Mellon.
The tax exemption for the interest earned from these funds is also worth far less in a near-zero rate market — “a worthless investment when there is no income,” says Crane. “What’s the advantage?”
Crane expects to see more consolidation in the money market space, especially in muni market and prime market space because “rates are so low funds can only charge half what they normally do.’’
So does Greg McBride, chief financial analyst, for Bankrate.com. He suggests that investors consider government money market funds and online savings accounts as alternatives to muni money market and prime money market funds if they want highly liquid funds.
“If you want to leave money in a brokerage or mutual fund account that is liquid and can be invested at a moment’s notice, then a government money fund is a suitable alternative,” says McBride. “If this is your emergency fund or money that will be on the sidelines a bit longer, look to an online savings account, which offer yields 10 times what you’re getting on most money funds, are fully liquid, and protected by federal deposit insurance.”
Money market funds in today’s market should be considered “a return of my money not a return on my money,” says Wiener.
At the same time, investors may be confused by the growing liquidations and consolidations among money market funds, especially if they have check-writing ability in their existing fund, says Wiener, noting that Vanguard’s money market funds don’t have that ability. He cautions advisors to make sure those clients get new checks in their new money market funds.