Vanguard Money Market Funds - Differences in Returns?

[water2357]

Anyone have any recommendations on the Vanguard Money Market Funds

Treasury
Federal
Cash Reserves

Treasury returns appeared to be increasing more quickly than the other two until now. It looks like both Federal and Cash Reserves have now slightly leaped over the Treasury MM.

Does anyone have any information on where the returns on these 3 funds are headed as the year progresses?

Treasury Bills of 1 to 3 months already appear to be slightly over 1%. Will all three funds ultimately settle in to about the same rate, or will one most likely have better returns than the others and which one?

Thanks for any guidance.

[retired@50]

Does anyone have any information on where the returns on these 3 funds are headed as the year progresses?

I suspect they will pretty much mimic the Fed funds rate with about a 30 day lag.

Regards,

[Tom_T]

The Treasury MM vs. Federal MM: different components, different duration. Treasury has higher yield.

[water2357]

So, if you had to choose one of the three, which one would it be?
Federal MM
Treasury MM
Cash Reserves

Or is there a reason to own more than one?

[heartwood]

So, if you had to choose one of the three, which one would it be?
Federal MM
Treasury MM
Cash Reserves

Or is there a reason to own more than one?

from vanguard site

VMFXX Vanguard Federal MM 0.58% as of 05/10/22
VUSXX Vanguard Treasury MM 0.46%
VMRXX Vanguard Cash Res Fed MM Adm 0.54%

FWIW, I looked a week or so ago. At that time VUSXX was at the same 0.46% and the others were lower. I moved into VUSXX from VMFXX with a sizable amount. Looks like with a week's time I should have stayed the course. No ideas where anything is heading in the year ahead.

[retired@50]

So, if you had to choose one of the three, which one would it be?
Federal MM
Treasury MM
Cash Reserves

Or is there a reason to own more than one?

I just use the Federal Money Market Fund since it's the default settlement account. Simple.

With the conservative approach that Vanguard takes to managing their money market funds I have no worries that any of them will ever break the buck and lose value.

Having said all that, my cash is currently sitting at my local credit union because they're paying me 1%. As soon as the rate on the Vanguard fund exceeds the credit union I'll move my cash.

Regards,

[diceman3]

So, if you had to choose one of the three, which one would it be?
Federal MM
Treasury MM
Cash Reserves

Or is there a reason to own more than one?

The Federal MM is the default Account. Recently, all 3 MM Fund prospectives we’re sent out, describing the info on all. While it’s unlikely that Cash Reserve Or Federal MM would default, it is important to note that Treasury MM are fully guaranteed by the U.S Government. With the other 2 MM, only 80% is guaranteed by the U.S. Government. FAIW.

[mega317]

How much money are we talking about here? It's not likely to make much difference. And you can always move your money around day to day to capture the greatest hundredth of a percent if you want.

Note that the treasury fund will be almost entirely exempt from state income tax, if that's relevant for you.

[NYCPete]

How much money are we talking about here? It's not likely to make much difference. And you can always move your money around day to day to capture the greatest hundredth of a percent if you want.

Note that the treasury fund will be almost entirely exempt from state income tax, if that's relevant for you.

I want to emphasize mega317's point, as it's instructive. If you're in a high tax bracket and you have a substantial amount of money sitting in a MM account, it's worth figuring out whether you'd be better off taking a lower yield that's exempt from state and/or federal taxes, or just going for the absolute highest rate. If you're in a state that Vanguard runs a muni MM fund for, that may be worth considering too.

Even interest from the default settlement fund, Vanguard's Federal Money Market Fund, is partly exempt from state taxes. Most years it's been about three quarters of the interest. Whether you can parse it out to this level is state dependent, so your mileage may vary. Here's the 2021 figures:
https://personal.vanguard.com/pdf/USGOIN_01_2022.pdf

Taking your tax rate into account may make a bigger difference than yield chasing.

Best,
Peter

[Kevin M]

As of today:



The taxable-equivalent yields (TEY) and after-tax yields (ATY) are based on my expected marginal tax rates of 22% fed and 9.3% state.

As of now I'd use VMFXX in both tax-advantaged and taxable. However, for 2021, about 73% of the income was from USGO (no state income tax), so I use that as an estimate for 2022. If I want certainty in taxable, I'd use one of the muni MM funds.

Here is the history of SEC yields for the taxable MM funds for the past 120 days:



And here are the TEYs (for my tax rates) for the last 120 days:



Kevin

[water2357]

Thanks for the additional analysis and to all for pointing out the state income tax implications. It's been so long since MM Funds yielded anything that I wasn't immediately considering the state income tax effect. Will need to keep all these issues in mind as yields continue to change. Currently looks like the Federal MM Fund may be the better option, but still need to look more closely at the state tax. Was trying to keep the number of Funds to a minimum, but may need to consider using 2. Thanks for the graphs, interesting comparison.

[Small Change]

It looks like Vanguard’s California MMF had, as of March 31, 19.8% of its assets in holdings subject to AMT.

I am in California and am not currently subject to AMT. If I put money into that fund, would I likely owe AMT, and is that a significant negative for this fund?

Here’s where I saw the 19.8% reference.

https://investor.vanguard.com/mutual-f ... olio/vctxx

[smooth_rough]

[OT comment removed by admin LadyGeek] Wholesale inflation climbed 11% in april.

[Northern Flicker]

Cash Reserves is like Federal but Cash Reserves has a slightly longer duration. CR should have a slightly higher return but slightly lower liquidity. When rates are rising, turnover to instruments at the higher rates will occur faster with Federal.

Treasury is like Federal but Treasury is 100% either instruments backed by the full faith and credit of the US Treasury, or instruments collateralized by such.

Treasury will generate very close to 100% of interest exempt from state and local taxes.

[mega317]

As of today:

Kevin I wonder if you wouldn’t mind terribly sharing your calculations? I plugged the numbers in myself as a learning exercise. I get the same ATY AND TEY in 8 cases but I’m a little off on TEY for the treasury and national muni funds. I’m using sec yield/(1-.093) for treasury and /(1-.22) for muni. Thanks

[rossington]

Cash Reserves is like Federal but Cash Reserves has a slightly longer duration. CR should have a slightly higher return but slightly lower liquidity. When rates are rising, turnover to instruments at the higher rates will occur faster with Federal.

Treasury is like Federal but Treasury is 100% either instruments backed by the full faith and credit of the US Treasury, or instruments collateralized by such.

Treasury will generate very close to 100% of interest exempt from state and local taxes.

I would add that Treasury has the longest average maturity of the the three,hence the yield lag.
Also it has the highest distribution (dividend) of the three as of the end of April.
FWIW

[increment]

I am in California and am not currently subject to AMT. If I put money into that fund, would I likely owe AMT, and is that a significant negative for this fund?

Taxpayers have to (re)calculate a minimum amount of income tax owed using a second system, with a very large exemption but without many tax deductions. If that minimum amount is greater than the amount calculated the regular way, then you additionally pay the difference and it's called the "AMT." If you are far from having these two calculations be close to each other (which is the normal situation) and are not planning to get a huge amount of income that is subject to AMT but tax-exempt in the regular calculation (which seems probable if you are talking about the kind of amounts you would get from a money-market fund), your AMT-taxable dividends are unlikely to switch you over to the AMT-owing side.

See Fairmark for the basic info about the AMT.

[arthurdawg]

I had to go to my account and look it up... it appears I am in the Federal fund now.

Once upon a time I was in the Prime money market... which I guess has changed? My brain vaguely recalls this... but not the details.


Anyway... I generally don't hold funds there long enough for it to matter between the three. The yields are never that much better.

[Kevin M]

As of today:

Kevin I wonder if you wouldn’t mind terribly sharing your calculations? I plugged the numbers in myself as a learning exercise. I get the same ATY AND TEY in 8 cases but I’m a little off on TEY for the treasury and national muni funds. I’m using sec yield/(1-.093) for treasury and /(1-.22) for muni. Thanks

Please see this thread from 2018: Taxable Equivalent Yield (TEY). It shows the derivations of the formulas I use.

Kevin

[Northern Flicker]

Cash Reserves is like Federal but Cash Reserves has a slightly longer duration. CR should have a slightly higher return but slightly lower liquidity. When rates are rising, turnover to instruments at the higher rates will occur faster with Federal.

Treasury is like Federal but Treasury is 100% either instruments backed by the full faith and credit of the US Treasury, or instruments collateralized by such.

Treasury will generate very close to 100% of interest exempt from state and local taxes.

I would add that Treasury has the longest average maturity of the the three,hence the yield lag.
Also it has the highest distribution (dividend) of the three as of the end of April.
FWIW

I don’t believe that was the case in the past. I wonder if Vanguard reduced the average maturity of VMRXX (cash reserves …) as a liquidity management decision or an active decision to try to boost return a little when short rates are rising.

If memory serves, I thought Vanguard was talking about an average maturity of around 80 days for the Cash Reserves fund when they announced that Prime MM had morphed into that. But I think the goal was to have a slightly higher return without the commercial paper exposure that Prime MM had, so maybe it makes sense that they would shorten duration as an active management decision in the current environment.

One other difference is that in brokerage accounts, the Federal MM fund has no minimum balance requirement because it is the settlement fund. The other two have a reasonably low $3K minimum. (Treasury MM used to have a $50K minimum that made it less useful than the Federal MM fund at that time).

[Northern Flicker]

So, if you had to choose one of the three, which one would it be?
Federal MM
Treasury MM
Cash Reserves

Or is there a reason to own more than one?

I use Federal MM for transient cash flows— distributions are realized there and sit there until I either move to them to a bank account or (re-)invest them. Or if I were to move cash to Vanguard for investment, I would deposit directly to Federal MM so that it would be readily available for either a mutual fund or ETF purchase.

If I had a cash position in my asset allocation, or otherwise maintained a cash bucket or emergency fund, ie if the asset were more of a permanent or long-term holding, I would use the Treasury MM fund for the slightly higher level of safety, and larger exemption from state income tax.

[Electron]

Vanguard Federal Money Market fund is showing 61.2% of assets in repurchase agreements as of 4-30-22. That may be an issue for the state tax exemption as there are threshold requirements in some states.

California, New York, and Connecticut require that 50% of assets at each quarter-end consist of U.S. Government obligations.

The last two fund reports show repurchase agreements at 24.2% and 43.8% of assets respectively. The concern is that the 2022 percentage in U.S. Government obligations could be quite a bit less than 2021.

[Small Change]

I am in California and am not currently subject to AMT. If I put money into that fund, would I likely owe AMT, and is that a significant negative for this fund?

Taxpayers have to (re)calculate a minimum amount of income tax owed using a second system, with a very large exemption but without many tax deductions. If that minimum amount is greater than the amount calculated the regular way, then you additionally pay the difference and it's called the "AMT." If you are far from having these two calculations be close to each other (which is the normal situation) and are not planning to get a huge amount of income that is subject to AMT but tax-exempt in the regular calculation (which seems probable if you are talking about the kind of amounts you would get from a money-market fund), your AMT-taxable dividends are unlikely to switch you over to the AMT-owing side.

See Fairmark for the basic info about the AMT.

Thank you!

[Kevin M]

The increase in fed MM fund leveled off today, with no change since Friday at 0.65%.

Treasury MM inched up a basis point, to 0.51%.



The muni MM funds continued their upward climb, with CA muni MM at 0.56% (TEY = 0.82% at 22% fed 9.3% state) and national muni MM at 0.60% (TEY = 0.79% at same marginal tax rates).



Kevin

[water2357]

Thanks for the updated graphs. Interesting comparison of the various Funds rates of increasing returns.