Finding Lower-Risk Yield Options in a Higher Interest Rate Environment
We hear a lot about the Fed and interest rates in the news. We many think of this as primarily about fighting inflation or increasing costs of borrowing. But there is a bright side. For the first time in a long time, you can earn relatively high interest on your cash if you invest it in a Money Market Fund or a high interest savings account.
If you examine the Ripsaw® Market Analysis Tool you will find that because of the state of the Yield curve you can get more yield per unit of risk in a money market than a direct bond investment which has interest rate change risk. Also, check out Ripsaw’s Lifetime Wealth Planning tool where the benchmark will show who the benefit of this asset allocation.
Choosing between Money Market Funds and High Yield Savings Accounts is about access and understanding the different characteristics.
A Money Market Fund is a type of mutual fund that invests in low-risk, short-term debt securities such as commercial paper, certificates of deposit, and Treasury bills. Money Market Funds aim to provide investors with a low-risk investment option that offers higher returns than a traditional savings account. They are typically managed by professional fund managers and are considered to be relatively safe, but they are not FDIC-insured, meaning that there is a risk of loss of principal. One other thing to note is that Money Markets Fund choices are typically dependent on your brokerage. However, the differences may be big enough to consider a new account and institution. See list below for a good list of options.
A High Yield Savings Account is a type of savings account that offers a higher interest rate than a traditional savings account. These accounts are offered by banks and credit unions and are FDIC-insured up to $250,000 per depositor, per institution. High Yield Savings Accounts are a safe place to store cash while earning a higher interest rate, but they are not investment vehicles. They are designed to provide a secure, low-risk option for people who want to earn more interest on their savings without exposing their money to market fluctuations. See list below for a good list of options.
In summary, Money Market Funds are investment vehicles that aim to provide higher returns than traditional savings accounts but are not FDIC-insured and may carry some degree of risk. High Yield Savings Accounts, on the other hand, are savings accounts that offer higher interest rates than traditional savings accounts and are FDIC-insured, making them a safe place to store cash.
Savings Account Options
It’s important to note that the best online savings account for you will depend on your individual financial needs and goals, such as the interest rate, fees, and accessibility. I would recommend comparing the features and terms of these accounts, as well as others, before making a decision. Its important to note that fees are not equal. Many online savings accounts with the highest APY may have hidden fees.
Top high-yield savings accounts for February 2023
- Ally Bank Online Savings Account 3.4% APY ($0 Fee)
- Capital One 360 Online Savings Account 3.875% APY
- SoFi Savings Account 3.75% APY
- Marcus by Goldman Sachs Online Savings Account 3.75% APY
- Primis Bank: 4.92% APY
- UFB Direct: 4.21% APY
- My Savings Direct: 4.35% APY
- Bask Bank: 4.25% APY: 4.25% APY
- BMO Harris: 4.20 APY
- Salem Five Direct: 4.10% APY
Money Market Funds
Top Money Market Fund Options for February 2023
- Vanguard Federal Money Market Fund (ticker: VMFXX)
- Vanguard Municipal Money Market Fund (VMSXX)
- Fidelity Money Market Fund (SPRXX)
- T. Rowe Price U.S. Treasury Money Fund (PRTXX)
- JPMorgan Prime Money Market Fund (VMVXX)
- Invesco Government Money Market Fund (INAXX)
- BlackRock Summit Cash Reserves Fund (MSAXX)
Vanguard Federal Money Market Fund (VMFXX)
One of the most popular money market funds with over $223 billion in assets under management, or AUM, is VMFXX. This fund is rather long-lived, debuting in 1981 and surviving multiple market crashes and recessions. Currently, VMFXX pays a seven-day SEC yield of 4.23% and costs an expense ratio of 0.11%.
Vanguard Municipal Money Market Fund (VMSXX)
Also from Vanguard is VMSXX, which debuted in 1980 and has since attracted $16.7 billion in assets under management. This fund is particularly alluring to investors in higher tax brackets looking for better tax efficiency from their money market fund.
All of VMSXX’s holdings are in securities exempt from federal income taxes. While the seven-day SEC yield is lower than VMFXX at 3%, the after-tax net return might be better depending on the investor’s income bracket. VMSXX has a 0.15% expense ratio and no minimum investment requirement.
Fidelity Money Market Fund (SPRXX)
Investors who favor Fidelity’s platform and suite of funds can opt for SPRXX. Like all money market funds, SPRXX targets a combination of liquidity, income potential and a stable $1 share price. It holds U.S. Treasury repurchase agreements, certificates of deposit and short-term commercial paper.
SPRXX has been around since 1989 and currently sports around $6.5 billion in AUM. Currently, the fund pays a seven-day SEC yield of 4.14%. However, it does have a significantly higher expense ratio than VMFXX at 0.42%, but carries no minimum investment requirements.
T. Rowe Price U.S. Treasury Money Fund (PRTXX)
PRTXX distinguishes itself from other money market funds via a heavy focus on U.S. Treasurys, which are backed by the full faith and credit of the federal government. These instruments are highly liquid, have virtually no default risk, and possess very low interest rate sensitivity.
Currently, PRTXX pays a seven-day SEC yield of 4.02% while charging an expense ratio of 0.31%. The fund has attracted AUM of $13.5 billion. The investor class of the fund requires a $2,500 minimum investment. For those with $500,000, the I class of the fund charges a lower expense ratio of 0.23%.
JPMorgan Prime Money Market Fund (VMVXX)
Another popular option among money market investors is VMVXX, which holds a mix of U.S. government and agency securities, floating rate notes, commercial paper, certificates of deposit, asset-backed securities and repurchase agreements.
Notably, VMVXX considers environmental, social and governance, or ESG, factors for its holdings. Since its inception in 1993, the fund has attracted $66.9 billion in AUM. VMVXX currently pays a seven-day SEC yield of 4.24%, charges an expense ratio of 0.5%, and requires a $1,000 minimum investment.
Invesco Government Money Market Fund (INAXX)
INAXX targets three objectives: current income, preservation of capital and daily liquidity. The fund achieves these objectives by investing in assets like agency debt, repurchase agreements and Treasury bills. Like many money market funds, INAXX pays out distributions on a monthly basis.
Currently, INAXX pays a seven-day SEC yield of 4.06%. The fund has attracted around $3.8 billion in AUM amid an average expense ratio of 0.36% for the investor class shares. The fund requires a minimum initial investment of $1,000 and $50 for subsequent purchases.
BlackRock Summit Cash Reserve Fund (MSAXX)
Like many money market funds, MSAXX seeks to maintain a stable $1 share price and daily liquidity by holding an assortment of U.S. Treasury bills, repurchase agreements and agency debt. Generally, the fund seeks to maintain a dollar-weighted average maturity of 60 days or less.
MSAXX is less popular than the previous choices, having attracted just $578 million in AUM. The fund currently pays a seven-day SEC yield of 3.73% and charges an expense ratio of 0.42%. However, it requires a fairly small minimum investment of $1,000.