VMMXX (Vanguard Prime MM) risks

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dodgersummer
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VMMXX (Vanguard Prime MM) risks

Post by dodgersummer » Fri Jun 08, 2018 11:11 am

In trying to understand about money markets, i see that a lot of people use/recommend VMMXX. I had a following questions....

1. How risky is VMMXX? Is it a safe place to put an emergency fund or is it "too risky" and not recommended for and EF?
2. If you have money in VMXXX and want to pull some of it out, is it taxed the same as taking money out from a savings account where you only pay fees/taxes on the interest earned?
2. CIT bank offers a money market fund with 1.85% interest that is FDIC insured. Does this mean that the CIT money market account cannot lose money?

Thanks in advance,

Robert

BogleMelon
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Re: VMMXX (Vanguard Prime MM) risks

Post by BogleMelon » Fri Jun 08, 2018 11:30 am

1- I think it is pretty safe, the only risk I learned that it could have somekind of freeze in a really bad crash. Never happened before to this fund though.
2- You pay taxes annually on the returns (dividends) the fund distributing
3- Yes, CIT FDIC MM account (it is not a MM fund) is risk free.
Image
Last edited by BogleMelon on Fri Jun 08, 2018 11:32 am, edited 2 times in total.
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David Jay
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Re: VMMXX (Vanguard Prime MM) risks

Post by David Jay » Fri Jun 08, 2018 11:31 am

Let me deal with #2:

Where you hold the fund determines taxation, not the fund itself.
1. If you hold the fund in a taxable account, you will be paid interest every year and some/all of that interest will be taxable in that tax year. It has nothing to do with withdrawals, there is no tax liability when you withdraw the funds from VMMXX or from the taxable account.
2. If you hold the fund in a tax-deferred account (tIRA, 401K, 403B, etc.), you will pay no taxes as long as the money remains inside the tax-deferred account. You can purchase "shares" in VMMXX and sell shares in VMMXX with no tax consequence. Money in a tax-deferred account is taxed as income when you withdraw the funds from the account (not from VMMXX).
3. If you hold the fund in a tax-exempt account (Roth, HSA, etc.), you will pay no taxes as long as the Roth funds are "qualified" (5 year clocks are met) at time of withdrawal from the account and the HSA funds are spent on health care.
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dodgersummer
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Re: VMMXX (Vanguard Prime MM) risks

Post by dodgersummer » Fri Jun 08, 2018 11:37 am

BogleMelon wrote:
Fri Jun 08, 2018 11:30 am
1- I think it is pretty safe, the only risk I learned that it could have somekind of freeze in a really bad crash. Never happened before to this fund though.
2- You pay taxes annually on the returns (dividends) the fund distributing
3- Yes, CIT FDIC MM account (it is not a MM fund) is risk free.
Image
For #1, so the money could only be freezed for a period of time but you wouldn't lose any money?

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David Jay
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Re: VMMXX (Vanguard Prime MM) risks

Post by David Jay » Fri Jun 08, 2018 11:37 am

BogleMelon wrote:
Fri Jun 08, 2018 11:30 am
1- I think it is pretty safe, the only risk I learned that it could have somekind of freeze in a really bad crash. Never happened before to this fund though.
As the poster said, this has not happened. But if it happened (due to a liquidity issue) it would likely be for a day, maybe two. Like an old fashioned "run" on a bank.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Toons
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Re: VMMXX (Vanguard Prime MM) risks

Post by Toons » Fri Jun 08, 2018 11:43 am

FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
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dodgersummer
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Re: VMMXX (Vanguard Prime MM) risks

Post by dodgersummer » Fri Jun 08, 2018 11:47 am

Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?

BogleMelon
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Re: VMMXX (Vanguard Prime MM) risks

Post by BogleMelon » Fri Jun 08, 2018 1:19 pm

dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates. While with CIT bank and others, the bank could keep the same rate even when treasury yield becomes higher. You are under their (the bank) terms.
Also you can write checks directly from your brokerage account that has VMMXX shares. You don't have a limit of 6 withdrawls per month with MM fund, unlike all saving and MM accounts.
Also it is more convenient to transfer money from your brokerage account to your Vanguard IRA account when you want.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

Personally, I have my savings split between this fund and I bonds.. Easier for me that way to not worry about inflation change or interest rates change..
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

onourway
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Re: VMMXX (Vanguard Prime MM) risks

Post by onourway » Fri Jun 08, 2018 1:23 pm

I keep most of my short-term savings in VMMXX. I don't have to chase rates and it's safe enough. It's not so much money that we would be overly harmed if things got locked up temporarily (which is an extremely unlikely event). Even for the rare fund that has broken the buck, investors eventually got their money back at something like .96 on the dollar or so.

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BrandonBogle
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Re: VMMXX (Vanguard Prime MM) risks

Post by BrandonBogle » Fri Jun 08, 2018 1:32 pm

On a related note, I hadn't noticed VMMXX got up there recently, with it's SEC Yield around 1.9% at this point. If the risk of breaking the buck is acceptable to an investor, anyone see a reason to not move funds from Ally @ 1.6% into VMMXX ?

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Re: VMMXX (Vanguard Prime MM) risks

Post by mickeyd » Fri Jun 08, 2018 3:13 pm

BrandonBogle wrote:
Fri Jun 08, 2018 1:32 pm
On a related note, I hadn't noticed VMMXX got up there recently, with it's SEC Yield around 1.9% at this point. If the risk of breaking the buck is acceptable to an investor, anyone see a reason to not move funds from Ally @ 1.6% into VMMXX ?
I have already done so. PMMF is climbing about 3bps weekly. Easy risk to assume.
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Riley15
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Re: VMMXX (Vanguard Prime MM) risks

Post by Riley15 » Fri Jun 08, 2018 3:19 pm

BogleMelon wrote:
Fri Jun 08, 2018 1:19 pm
dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

This here is completely False.

VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.

Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
Last edited by Riley15 on Fri Jun 08, 2018 3:59 pm, edited 1 time in total.

dodgersummer
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Re: VMMXX (Vanguard Prime MM) risks

Post by dodgersummer » Fri Jun 08, 2018 3:26 pm

Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
BogleMelon wrote:
Fri Jun 08, 2018 1:19 pm
dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

This here is completely False.

VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.

Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
Are foreign bonds pretty volatile?

Riley15
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Re: VMMXX (Vanguard Prime MM) risks

Post by Riley15 » Fri Jun 08, 2018 3:30 pm

dodgersummer wrote:
Fri Jun 08, 2018 3:26 pm
Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
BogleMelon wrote:
Fri Jun 08, 2018 1:19 pm
dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

This here is completely False.

VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.

Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
Are foreign bonds pretty volatile?
As of the last couple of weeks Italian, German and most Euro bonds were hit hard. I don't know what the exact allocations are in the Prime Money Market.

BogleMelon
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Re: VMMXX (Vanguard Prime MM) risks

Post by BogleMelon » Fri Jun 08, 2018 3:31 pm

Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
BogleMelon wrote:
Fri Jun 08, 2018 1:19 pm
dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

This here is completely False. VMMXX Prime Money Market is apprximately 40% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured. Treat it like a bond fund with international bonds. If you're not comfortable buying a foreign bond funds why would you not care in a money market.
What is exactly "completely False"?!!
The fund consists of good portion of treasuries and CD's that would go up when rates go up (52.2% of its holding).
No, it shouldn't be treated as a bond fund. A bond fund do not promise to keep its NAV value. Yes it is not FDIC insured, but it is not a bond fund either.
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lack_ey
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Re: VMMXX (Vanguard Prime MM) risks

Post by lack_ey » Fri Jun 08, 2018 3:38 pm

Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.

Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
Is this intentionally intending to be misleading? Foreign bond funds as normally understood generally mean bonds issued outside the US generally in non-USD currency, or sometimes including emerging markets bonds (sometimes not local currency, but USD). Usually this means currency exchange risk or currency hedging, and/or more substantial credit risk.

The foreign bonds you're talking about are really commercial paper or certificates of deposit issued in USD by institutions such as the Bank of Montreal (Chicago Branch), Credit Suisse AG (New York Branch), Nestle, Ontario Teachers' Finance Trust, Comonwealth Bank of Australia, and so on, based on the last annual report. And this would be short-term instruments, not bonds in the sense of non-short-term debt.

US bond funds and something like the Bloomberg Barclays Aggregate includes USD issues from these kinds of institutions. They're considered part of the US bond market.

It's definitely not FDIC insured, though, and has some risk.

BogleMelon wrote:
Fri Jun 08, 2018 3:31 pm
The fund consists of good portion of treasuries and CD's that would go up when rates go up (52.2% of its holding).
They're not negative duration and don't go up if rates go up, and most are not floating rate either. It's just short term, like money market funds have to own.

Riley15
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Re: VMMXX (Vanguard Prime MM) risks

Post by Riley15 » Fri Jun 08, 2018 3:58 pm

lack_ey wrote:
Fri Jun 08, 2018 3:38 pm
Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.

Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
Is this intentionally intending to be misleading? Foreign bond funds as normally understood generally mean bonds issued outside the US generally in non-USD currency, or sometimes including emerging markets bonds (sometimes not local currency, but USD). Usually this means currency exchange risk or currency hedging, and/or more substantial credit risk.

The foreign bonds you're talking about are really commercial paper or certificates of deposit issued in USD by institutions such as the Bank of Montreal (Chicago Branch), Credit Suisse AG (New York Branch), Nestle, Ontario Teachers' Finance Trust, Comonwealth Bank of Australia, and so on, based on the last annual report. And this would be short-term instruments, not bonds in the sense of non-short-term debt.

US bond funds and something like the Bloomberg Barclays Aggregate includes USD issues from these kinds of institutions. They're considered part of the US bond market.

It's definitely not FDIC insured, though, and has some risk.

BogleMelon wrote:
Fri Jun 08, 2018 3:31 pm
The fund consists of good portion of treasuries and CD's that would go up when rates go up (52.2% of its holding).
They're not negative duration and don't go up if rates go up, and most are not floating rate either. It's just short term, like money market funds have to own.
I just saw the annual report and it looks like it does have a lot of foreign exposure in commercial paper also. Not meant to be misleading at all. Maybe not exactly bond funds but not also all treasuries either as the previous comment seem to indicate.

Even though foreign entities may issue debt in dollars they are still susceptible to changes in their own currency and are probably heavily invested in their central banks. The risks may be hidden and multi-layered but they are still there.

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Re: VMMXX (Vanguard Prime MM) risks

Post by Nate79 » Fri Jun 08, 2018 4:02 pm

Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
BogleMelon wrote:
Fri Jun 08, 2018 1:19 pm
dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

This here is completely False.

VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.

Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
To be clear, VMMXX has currently 42.8% of the category Yankee/Foreign category.
Here is a past thread on what exactly Yankee/Foreign means. It is not in any way similar saying it holds "Foreign Bonds":
viewtopic.php?t=206799

If you look in the annual report you will see what is in this category. Basically it is bank deposits in foreign banks and Yankee CD's (CD's issued in the US by foreign banks). The holdings and percentages change all the time but as of the annual report on Vanguard's website the fund held about 4% total of foreign govt and foreign company notes of some sort.

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Re: VMMXX (Vanguard Prime MM) risks

Post by lostdog » Fri Jun 08, 2018 5:42 pm

Or just go with the Federal Money Market sweep account. There is a reason Vanguard used that fund for the sweep account instead of Prime money market. I am going to guess because of less risk.
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Re: VMMXX (Vanguard Prime MM) risks

Post by MotoTrojan » Fri Jun 08, 2018 7:25 pm

BogleMelon wrote:
Fri Jun 08, 2018 1:19 pm
dodgersummer wrote:
Fri Jun 08, 2018 11:47 am
Toons wrote:
Fri Jun 08, 2018 11:43 am
FYI
From Vanguard Prospectus

"You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot guarantee it
will do so. "


:happy
With VMMXX paying out approximately 1.91% with risk and CIT bank paying 1.85% with no risk for .06% difference, CIT bank seems like the smart play here or am i missing something?
VMMXX is tied to the treasury and interest rate market. You may not need to chase returns if you have it when rates go up, as the fund will reflect the new rates. While with CIT bank and others, the bank could keep the same rate even when treasury yield becomes higher. You are under their (the bank) terms.
Also you can write checks directly from your brokerage account that has VMMXX shares. You don't have a limit of 6 withdrawls per month with MM fund, unlike all saving and MM accounts.
Also it is more convenient to transfer money from your brokerage account to your Vanguard IRA account when you want.

But if you really worry that much for a MM fund to break the buck, then I agree, stay with the bank..

Personally, I have my savings split between this fund and I bonds.. Easier for me that way to not worry about inflation change or interest rates change..
Not sure I'd be comfortable writing checks from an account that doesn't include banking protections. Pretty easy for someone to take the check and withdraw (or deposit, if they are feeling nice) at will.

WanderingDoc
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Re: VMMXX (Vanguard Prime MM) risks

Post by WanderingDoc » Fri Jun 08, 2018 10:01 pm

You guys I guess are quicker/braver than I. I currently hold about 5X the capital in my Ally Savings account than my VMMXX taxable account. It just seems more liquid/easier to move around. When I want to wire funds for a syndicated real estate deal as an equity partner, I can just log onto Ally or call them, and boom!, my funds are wired. I wouldn't even know how to do with the the VMMXX in the Vanguard brokerage account.
mickeyd wrote:
Fri Jun 08, 2018 3:13 pm
BrandonBogle wrote:
Fri Jun 08, 2018 1:32 pm
On a related note, I hadn't noticed VMMXX got up there recently, with it's SEC Yield around 1.9% at this point. If the risk of breaking the buck is acceptable to an investor, anyone see a reason to not move funds from Ally @ 1.6% into VMMXX ?
I have already done so. PMMF is climbing about 3bps weekly. Easy risk to assume.
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Re: VMMXX (Vanguard Prime MM) risks

Post by BogleMelon » Fri Jun 08, 2018 10:59 pm

Riley15 wrote:
Fri Jun 08, 2018 3:58 pm
Maybe not exactly bond funds but not also all treasuries either as the previous comment seem to indicate.
The "previous comment" didn't claim it is "all" treasuries. The "previous comment" indicated: VMMXX is tied to the treasury and interest rate market
The "previous comment" believe that the amount of the CD's and Treasuries in the fund is high enough to create a relationship between the interest rates direction and the fund SEC yield.

Here is a YTD showing the fund performance (blue line) vs T-bill auction rates (green line)*
Image


3 years relation:
Image

5 years relation:
Image

And finally since 1975 (please ignore the orange and yellow line):
Image

* If I interpret these graphs wrong, I would be happy to learn what is the right way to look at it..
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

pascalwager
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Re: VMMXX (Vanguard Prime MM) risks

Post by pascalwager » Sat Jun 09, 2018 12:48 am

I don't understand why Vanguard would produce money market funds meant to hold cash that are not riskless and don't understand why anyone would want to place their cash in such funds. I guess Vanguard is simply competing with the banks and Treasury Direct for it's share of our cash investments.

Dancer
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Re: VMMXX (Vanguard Prime MM) risks

Post by Dancer » Sat Jun 09, 2018 1:20 am

Other options are Federal MM, Treasury MM ($50k min), or TBills directly.

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Re: VMMXX (Vanguard Prime MM) risks

Post by jalbert » Sat Jun 09, 2018 2:36 am

dodgersummer wrote:
Fri Jun 08, 2018 11:37 am
BogleMelon wrote:
Fri Jun 08, 2018 11:30 am
1- I think it is pretty safe, the only risk I learned that it could have somekind of freeze in a really bad crash. Never happened before to this fund though.
2- You pay taxes annually on the returns (dividends) the fund distributing
3- Yes, CIT FDIC MM account (it is not a MM fund) is risk free.
Image
For #1, so the money could only be freezed for a period of time but you wouldn't lose any money?
You can lose money investing in the prime money market fund. It seems unlikely. Before 2008, I would have said very unlikely, which is probably still more accurate. You take credit default risk with this fund, but it is high credit quality and the credit is diversified. The Vanguard Federal Money Market fund is even safer with 75-80% of holdings in t-bills. The Treasury money market fund is the safest and at least as safe as an FDIC-insured bank account, but it has a high minimum balance.
Risk is not a guarantor of return.

pascalwager
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Re: VMMXX (Vanguard Prime MM) risks

Post by pascalwager » Sat Jun 09, 2018 12:55 pm

jalbert wrote:
Sat Jun 09, 2018 2:36 am
dodgersummer wrote:
Fri Jun 08, 2018 11:37 am
BogleMelon wrote:
Fri Jun 08, 2018 11:30 am
1- I think it is pretty safe, the only risk I learned that it could have somekind of freeze in a really bad crash. Never happened before to this fund though.
2- You pay taxes annually on the returns (dividends) the fund distributing
3- Yes, CIT FDIC MM account (it is not a MM fund) is risk free.
Image
For #1, so the money could only be freezed for a period of time but you wouldn't lose any money?
You can lose money investing in the prime money market fund. It seems unlikely. Before 2008, I would have said very unlikely, which is probably still more accurate. You take credit default risk with this fund, but it is high credit quality and the credit is diversified. The Vanguard Federal Money Market fund is even safer with 75-80% of holdings in t-bills. The Treasury money market fund is the safest and at least as safe as an FDIC-insured bank account, but it has a high minimum balance.
No, the VG Federal MM fund is only 40.3% Treasuries. And Vanguard explicitly warns that most of the assets are not covered by the federal full faith and credit clause.

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welderwannabe
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Re: VMMXX (Vanguard Prime MM) risks

Post by welderwannabe » Sat Jun 09, 2018 1:52 pm

pascalwager wrote:
Sat Jun 09, 2018 12:55 pm
No, the VG Federal MM fund is only 40.3% Treasuries. And Vanguard explicitly warns that most of the assets are not covered by the federal full faith and credit clause.
I don't want to dig through the last annual report, but I think it is about 40% Treasuries and another 40% GSEs, which since they were basically taken back over from the government after 2008 are pretty much implicitly guaranteed. The other 20% or so are repos, which generally use treasuries as collateral.

That said, I don't feel the need to use the Federal MM. I am currently using the Municipal MM (and regretting it at the moment due to the crappy yield), but I would sleep like a baby in Prime MM as well. Maybe I am whistling past the graveyard, but Vanguard did well in 2008 with Prime and I trust them.
Last edited by welderwannabe on Sat Jun 09, 2018 1:53 pm, edited 1 time in total.
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Re: VMMXX (Vanguard Prime MM) risks

Post by MnD » Sat Jun 09, 2018 1:53 pm

pascalwager wrote:
Sat Jun 09, 2018 12:48 am
I don't understand why Vanguard would produce money market funds meant to hold cash that are not riskless and don't understand why anyone would want to place their cash in such funds. I guess Vanguard is simply competing with the banks and Treasury Direct for it's share of our cash investments.
Vanguard Prime was my first investment outside FDIC products in 1986. It's fun to see the next generation of investors "discovering" these products after nearly a decade of no return on cash. i guess for many, MM funds were either forgotten about or simply undiscovered from 2008-2016 due to their being little to no financial incentive to invest in them.

Prime type MM funds have been popular for decades and "broke" the monopoly that banks had on savers where due to Regulation Q prior to 1983, no interest could be paid on demand accounts and other bank accounts were limited to 5.25%.

These rules were relaxed in part due to competition from MM funds. MM fund investing practices are inherently very safe while banking practices (borrowing short and lending long) can be quite risky but are "made safe" due to FDIC insurance. Prime type money market funds invest in very high quality, very short term bank, government and commercial paper. Current Prime category MM funds have one week liquidity for around 50% of assets.

Bank deposits which are used for things like making sub-prime auto loans or 30-year home loans to people of so-so credit and other rather speculative lending are only made "riskless" due to bank regulation and federal deposit insurance. MM funds are not perfectly riskless, but are one of the lowest risk financial products available.

https://www.sec.gov/divisions/investmen ... 018-04.pdf

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Re: VMMXX (Vanguard Prime MM) risks

Post by welderwannabe » Sat Jun 09, 2018 1:57 pm

lostdog wrote:
Fri Jun 08, 2018 5:42 pm
Or just go with the Federal Money Market sweep account. There is a reason Vanguard used that fund for the sweep account instead of Prime money market. I am going to guess because of less risk.
It is because the SEC basically made them. It is part of money market reform. A couple of MM's had problems during 2008 (not Vanguard's), and the govt had to backstop Money Markets to stop the panic selling of money market funds. Govt mandated that all MM funds used as settlement funds had to invest in US govt paper only. Treasuries, GSEs, and repos backed by treasuries.
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Re: VMMXX (Vanguard Prime MM) risks

Post by bayview » Sat Jun 09, 2018 2:02 pm

lostdog wrote:
Fri Jun 08, 2018 5:42 pm
Or just go with the Federal Money Market sweep account. There is a reason Vanguard used that fund for the sweep account instead of Prime money market. I am going to guess because of less risk.
There was some SEC regulation that required that VMFXX be used as the sweep account as of October 2016.

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Re: VMMXX (Vanguard Prime MM) risks

Post by welderwannabe » Sat Jun 09, 2018 2:06 pm

MnD wrote:
Sat Jun 09, 2018 1:53 pm
Vanguard Prime was my first investment outside FDIC products in 1986. It's fun to see the next generation of investors "discovering" these products after nearly a decade of no return on cash. i guess for many, MM funds were either forgotten about or simply undiscovered from 2008-2016 due to their being little to no financial incentive to invest in them.

Prime type MM funds have been popular for decades and "broke" the monopoly that banks had on savers where due to Regulation Q prior to 1983, no interest could be paid on demand accounts and other bank accounts were limited to 5.25%.

These rules were relaxed in part due to competition from MM funds. MM fund investing practices are inherently very safe while banking practices (borrowing short and lending long) can be quite risky but are "made safe" due to FDIC insurance. Prime type money market funds invest in very high quality, very short term bank, government and commercial paper. Current Prime category MM funds have one week liquidity for around 50% of assets.

Bank deposits which are used for things like making sub-prime auto loans or 30-year home loans to people of so-so credit and other rather speculative lending are only made "riskless" due to bank regulation and federal deposit insurance. MM funds are not perfectly riskless, but are one of the lowest risk financial products available.

https://www.sec.gov/divisions/investmen ... 018-04.pdf
Good post. I agree with you. My opinion (and look at my sig, so take it with a grain of salt) is that above FDIC insurance limits my money is safer in a high quality MM.
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Re: VMMXX (Vanguard Prime MM) risks

Post by cherijoh » Sat Jun 09, 2018 2:12 pm

lostdog wrote:
Fri Jun 08, 2018 5:42 pm
Or just go with the Federal Money Market sweep account. There is a reason Vanguard used that fund for the sweep account instead of Prime money market. I am going to guess because of less risk.
Actually it was switched due to a change in SEC regulations. Possibly tied to some other MM funds that juiced their returns in ways not transparent to the customers. There used to be lots of "Money Market Plus" funds, some of which broke the bank. But yes, the Federal MM fund does have lower risk.

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Re: VMMXX (Vanguard Prime MM) risks

Post by jalbert » Sat Jun 09, 2018 2:55 pm

No, the VG Federal MM fund is only 40.3% Treasuries. And Vanguard explicitly warns that most of the assets are not covered by the federal full faith and credit clause.
It is 40% treasuries and 17% repos collateralized by treasuries, and 43% GSEs. It had been higher in treasuries and repos collateralized by treasuries. The GSEs are the securities not backed by the full faith and credit of the US treasury, so 57% (not 75-80%) is the number currently. The Federal MMF meets the requirements to avoid having to activate liquidity constraints.

You can lose money with VMFXX as well, but it is less likely than for Prime MMF.
Risk is not a guarantor of return.

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Re: VMMXX (Vanguard Prime MM) risks

Post by mickeyd » Sat Jun 09, 2018 3:12 pm

When I want to wire funds for a syndicated real estate deal as an equity partner, I can just log onto Ally or call them, and boom!, my funds are wired.
Since a MMF is not a bank, I do not believe that it can transfer cash ASAP like a bank can. The PMMF does, however, have a checking account that allows you to write checks directly off of the proceeds.
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Re: VMMXX (Vanguard Prime MM) risks

Post by garlandwhizzer » Sat Jun 09, 2018 3:13 pm

pascalwager wrote:
I don't understand why Vanguard would produce money market funds meant to hold cash that are not riskless and don't understand why anyone would want to place their cash in such funds. I guess Vanguard is simply competing with the banks and Treasury Direct for it's share of our cash investments.
I disagree. Prime MMF is a huge holding in my portfolio at present, not only in the emergency fund but currently as part of my bond portfolio because rising rates have produced negative retunes for longer duration bonds. PMMF survived the economic collapse of 2007-9 and has never in its 43 year history broken the $1 principal value. Like most Vanguard funds it is conservatively run with IMO appropriate fiduciary duty. That is sufficient reassurance from a risk point of view for me but we're all different which is why Vanguard offers the Federal MMF.

There are market issues that I worry about, but one thing I lose no sleep over is that PMMF will break the buck. This country's economy cannot run without the ability of corporations/individuals to get ultra short term financing to meet current expected or unexpected expenses. MMF a necessity for liquidity in day to day economic transactions and their volume far exceeds the issuance of governmental agencies. If conservatively run MMF fail, the economy disintegrates quickly, something a rational government would not allow.

Garland Whizzer

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Re: VMMXX (Vanguard Prime MM) risks

Post by pascalwager » Sat Jun 09, 2018 7:11 pm

garlandwhizzer wrote:
Sat Jun 09, 2018 3:13 pm
pascalwager wrote:
I don't understand why Vanguard would produce money market funds meant to hold cash that are not riskless and don't understand why anyone would want to place their cash in such funds. I guess Vanguard is simply competing with the banks and Treasury Direct for it's share of our cash investments.
I disagree. Prime MMF is a huge holding in my portfolio at present, not only in the emergency fund but currently as part of my bond portfolio because rising rates have produced negative retunes for longer duration bonds. PMMF survived the economic collapse of 2007-9 and has never in its 43 year history broken the $1 principal value. Like most Vanguard funds it is conservatively run with IMO appropriate fiduciary duty. That is sufficient reassurance from a risk point of view for me but we're all different which is why Vanguard offers the Federal MMF.

There are market issues that I worry about, but one thing I lose no sleep over is that PMMF will break the buck. This country's economy cannot run without the ability of corporations/individuals to get ultra short term financing to meet current expected or unexpected expenses. MMF a necessity for liquidity in day to day economic transactions and their volume far exceeds the issuance of governmental agencies. If conservatively run MMF fail, the economy disintegrates quickly, something a rational government would not allow.

Garland Whizzer
OK, thanks for the insights. Do you know the reason for the high minimum ($50k) for the Treasury MM fund and why it closed several years ago?

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Re: VMMXX (Vanguard Prime MM) risks

Post by jalbert » Sat Jun 09, 2018 7:15 pm

It was closed to new investors when rates were so low that it was difficult for interest earned to cover the costs. If investment yield cannot cover ER, you can see there is a problem.

The $50K minimum is because it is an admiral share class fund that is not an index fund. All admiral shares have a $10K minimum for index funds, and $50K minimum for non-index funds.
Risk is not a guarantor of return.

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Re: VMMXX (Vanguard Prime MM) risks

Post by smectym » Sun Jun 10, 2018 3:28 am

The posts above are instructive.

In addition, the key issue regarding the safety of Vanguard Prime Money Market is spotlighted here:

https://investor.vanguard.com/mutual-fu ... et-reform/

In a future crisis, under recently drafted SEC regs, Prime may be subject to mandatory “gates” (temporary suspension of investors’ right to withdraw their money) and/or “fees” (of up to 2% on any investor withdrawal).

As opposed to Prime, Vanguard Federal MM ($3,000 acccount minimum) and Vanguard Treasury MM ($50,000 minimum) are not subject to the above-noted mandatory gates and fees.

I have a high level of confidence that Vanguard manages all its money market funds wisely and with full cognizance of all foreseeable market and regulatory risks. No doubt Prime is a safe—even very safe—money market option.

Nevertheless, since Vanguard Federal and Treasury MM are not subject to the significant regulatory risks noted above, a risk-averse investor should consider preferring them to Prime—which is subject to those risks.

Smectym

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Re: VMMXX (Vanguard Prime MM) risks

Post by sco » Sun Jun 10, 2018 1:16 pm

Does fidelity have a similar dund to VMMXX?

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Re: VMMXX (Vanguard Prime MM) risks

Post by lack_ey » Sun Jun 10, 2018 2:06 pm

sco wrote:
Sun Jun 10, 2018 1:16 pm
Does fidelity have a similar dund to VMMXX?
Similar in terms of what? If you just mean a taxable retail money market fund, of course. Money market funds are a large, old, established category, and this is the most common type. Fidelity runs a number of money market funds.

See Fidelity Money Market Fund (SPRXX, FZDXX with $100k minimum for slightly lower ER). The yield is lower because the expense ratio is higher.

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Re: VMMXX (Vanguard Prime MM) risks

Post by sco » Sun Jun 10, 2018 3:07 pm

I was looking for something with about 10-20k entry and just a reasonable place to park cash. But it would have to beat Ally 1.6%

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Re: VMMXX (Vanguard Prime MM) risks

Post by bluerafters » Sun Jun 10, 2018 4:17 pm

Fascinating thread bookmarked for future use. I can't decide myself where to go with a 10k I have in a Barclay's savings at the moment.

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Re: VMMXX (Vanguard Prime MM) risks

Post by IlikeJackB » Sun Jun 10, 2018 6:10 pm

garlandwhizzer wrote:
Sat Jun 09, 2018 3:13 pm
..... something a rational government would not allow.

Garland Whizzer
I'm not convinced we have a rational government at the moment.
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Re: VMMXX (Vanguard Prime MM) risks

Post by jmk » Sun Jun 10, 2018 9:25 pm

Riley15 wrote:
Fri Jun 08, 2018 3:19 pm
VMMXX Prime Money Market is approximately 45% Foreign Bonds, so know what you're getting into. It's not a savings account and not FDIC insured.
Treat it like a bond fund with International Bonds. If you're not comfortable buying Foreign Bond Funds why would you not care in a money market.
True enough. But the foreign bonds add some diversification away from US interest and country risk. If a crisis forced them to lock things up foreign banks might not have the same issues.

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Re: VMMXX (Vanguard Prime MM) risks

Post by jalbert » Mon Jun 11, 2018 7:57 pm

sco wrote:
Sun Jun 10, 2018 3:07 pm
I was looking for something with about 10-20k entry and just a reasonable place to park cash. But it would have to beat Ally 1.6%
The VG Federal Money Market fund vmfxx has a 7-day compound/effective yield of 1.76% today. It is not FDIC-insured. All else equal, I would take 1.6% insured from an online bank over 1.76% not insured, but I use vmfxx nonetheless as it is more convenient for my purposes.
Risk is not a guarantor of return.

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Re: VMMXX (Vanguard Prime MM) risks

Post by gmaynardkrebs » Mon Jun 11, 2018 8:53 pm

garlandwhizzer wrote:
Sat Jun 09, 2018 3:13 pm
... If conservatively run MMF fail, the economy disintegrates quickly, something a rational government would not allow.
I think the risk of the Prime MMF is negligible, but the Fed no longer has the authority to guarantee the $1 price. People who want FDIC insurance should use FDIC banks.

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Re: VMMXX (Vanguard Prime MM) risks

Post by sco » Mon Jun 11, 2018 9:43 pm

jalbert wrote:
Mon Jun 11, 2018 7:57 pm
sco wrote:
Sun Jun 10, 2018 3:07 pm
I was looking for something with about 10-20k entry and just a reasonable place to park cash. But it would have to beat Ally 1.6%
The VG Federal Money Market fund vmfxx has a 7-day compound/effective yield of 1.76% today. It is not FDIC-insured. All else equal, I would take 1.6% insured from an online bank over 1.76% not insured, but I use vmfxx nonetheless as it is more convenient for my purposes.
I'm at Fidelity, but SPRXX, Fidelity Money Market Fund 1.7% $2500 minimum seems reasonable. Of course it is barely above the Ally 1.6%, but looking a little longer term it could be useful if rates continue to rise.

It is nice consolidating to minimal locations.

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Re: VMMXX (Vanguard Prime MM) risks

Post by jalbert » Mon Jun 11, 2018 11:41 pm

SPRXX holdings are less than 1% treasuries. The fund has an expense ratio of 0.42%. It has to take more risk than the Vanguard Federal or Treasury MMF just to overcome the ER and have a rate that is competitive with those funds.

Fidelity has excellent index funds, but other than a total bond index fund, most fidelity fixed income offerings have significantly higher expense ratios than analogous Vanguard funds.
Risk is not a guarantor of return.

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Re: VMMXX (Vanguard Prime MM) risks

Post by sco » Mon Jun 11, 2018 11:56 pm

I agree, but aren't those returns already including those expenses?

I guess what I am looking for, is what is actually the risks that they are taking for those marginally better returns?

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Re: VMMXX (Vanguard Prime MM) risks

Post by jalbert » Tue Jun 12, 2018 3:01 am

sco wrote:
Mon Jun 11, 2018 11:56 pm
I agree, but aren't those returns already including those expenses?

I guess what I am looking for, is what is actually the risks that they are taking for those marginally better returns?
It is taking more risk (credit risk, liquidity risk) to get returns that almost match vanguard's federal or treasury MMF. The risk premium is flowing to Fidelity via the ER.
Risk is not a guarantor of return.

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