But when it comes to picking money market funds, investors tend to focus on one metric only: yield. By implication, this oversimplistic comparison assumes that aside from yield, all money market funds are equal – a common mistake which could place your investment at greater risk than you may have thought.
So how are some money market funds able to offer more attractive yields than others? There are essentially two options:2. Including a higher ratio of lower-rated debt. For example, going into 2020, very few people – if any – could have predicted that interest rates would fall by 3.0%. This meant that money market funds that had exposure to more floating rate investments would have immediately experienced a reduction in yield. By contrast, funds with more fixed rate investments would have been able to better protect themselves – at least temporarily – against the aggressive interest rate cuts.
So the allocation of fixed versus floating rate investments can cause a significant difference or dispersion in fund yields . But, overall, if you see a money market fund offering a relatively high yield, you would be wise to generally exercise some caution. While the yield may appear attractively high, this may be accompanied by increased risk.