The Best Money-Market Funds

One investment class that has seen big inflows this year is also one of the humblest: money-market funds.

Tom Roseen, head of research at LSEG Lipper, says that in addition to strong yields, concerns about the stock market rally’s narrow breadth, persistent inflation, a potential recession, geopolitical worries over Russia’s war in Ukraine, and weakness in the Chinese economy probably drew investors’ dry powder.

The bulk of assets in retail money-market funds are in government funds, either those that just hold U.S. Treasury notes and Treasury repurchase agreements, or those that hold Treasury notes, agency debt, and repurchase agreements.The other two categories are municipal money-market funds that own state and local government debt, and prime money-market funds, which own a variety of high-quality, very-short-term financial instruments including U.S.

Big Differences Unlike other investment vehicles where a long-term track record is crucial, in money-market funds, the seven-day yield gives investors the clearest picture of current yield and dividend payments. Because of the very short-term nature of these funds, the yield can fluctuate depending on what portfolio managers purchase that week.

Liquidity is always important, but heading into the end of the year, it becomes even more so, since investors may need to access more cash or will buy more shares. She does this while balancing the possibility of another Fed interest-rate hike and wanting to have the ability to buy higher-yielding securities if monetary policy tightens further.

Raneri had kept the fund with a shorter maturity, but started to go out slightly further on the yield curve about a month ago, as she and Eaker believe that yields are starting to peak. They expect one more 0.25% rate hike, so they’re pushing the maturity to closer to 55 days, although she says the maturity can fluctuate.

Minding Taxes Fund buyers should keep taxes in mind as they choose a money-market fund, as some funds’ dividends are taxable. Vanguard’s Schwartz says his fund appeals to tax-sensitive, high-net-worth investors looking to shelter some gains from federal taxes, for example.

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