Vanguard Federal MM vs Ally Savings

[Phinance]

How do I compare Vanguard Federal MM (VMFXX - SEC 7 day yield 2.08%) to Ally Savings (currently 1.6%)? How do you compare the two percentages listed for highest yield on cash? (Bang for Buck) Saw VMFXX has a 0.11% expense ratio. Going to start savings for home deposit for purchase in the next few years. Thanks in advance.

[Startled Cat]

2.08% > 1.6%, done?

[H-Town]

How do I compare Vanguard Federal MM (VMFXX - SEC 7 day yield 2.08%) to Ally Savings (currently 1.6%)? How do you compare the two percentages listed for highest yield on cash? (Bang for Buck) Saw VMFXX has a 0.11% expense ratio. Going to start savings for home deposit for purchase in the next few years. Thanks in advance.

2.08% is net of expense ratio, and it's what you get. You still owe income tax though.

[Phinance]

I see, 0.11 expense ratio already deduct. Ok 2.08% > 1.60%, yes done. Thank you.

[anon_investor]

I see, 0.11 expense ratio already deduct. Ok 2.08% > 1.60%, yes done. Thank you.

The gap will widen as VMFXX's yield is likely to continue to raise daily and Ally seems to only raise its rates every 1-3 weeks.

[drg02b]

I see, 0.11 expense ratio already deduct. Ok 2.08% > 1.60%, yes done. Thank you.

Overnight repo rate (which is 64% of VMFXX holdings) is 2.3%, so VMFXX 7-day yield should be around that within another week or so.

[Northern Flicker]

How do I compare Vanguard Federal MM (VMFXX - SEC 7 day yield 2.08%) to Ally Savings (currently 1.6%)? How do you compare the two percentages listed for highest yield on cash? (Bang for Buck) Saw VMFXX has a 0.11% expense ratio. Going to start savings for home deposit for purchase in the next few years. Thanks in advance.

2.08% is net of expense ratio, and it's what you get. You still owe income tax though.

A sizable fraction of the yield of VMFXX is exempt from state and local income tax. None of the yield of Ally Savings is. If you live in a state that taxes income, this would be part of the comparison if held in a taxable account.

[anon_investor]

How do I compare Vanguard Federal MM (VMFXX - SEC 7 day yield 2.08%) to Ally Savings (currently 1.6%)? How do you compare the two percentages listed for highest yield on cash? (Bang for Buck) Saw VMFXX has a 0.11% expense ratio. Going to start savings for home deposit for purchase in the next few years. Thanks in advance.

2.08% is net of expense ratio, and it's what you get. You still owe income tax though.

A sizable fraction of the yield of VMFXX is exempt from state and local income tax. None of the yield of Ally Savings is. If you live in a state that taxes income, this would be part of the comparison if held in a taxable account.

Unless you live in CA, CT or NY; since it is unlikely VMFXX will meet those states requirements for state/local tax exemption.

[arcticpineapplecorp.]

one is fdic insured. the other is not.

money market accounts (at a bank) are fdic insured.

money market mutual funds (like vanguard's) are not.

ally is fdic.

some will pile on and say the money market mutual fund is low risk.

that's fine. it's not fdic insured.

it's important to understand the difference.

money market funds can break the buck.

whether the federal government wants to backstop that the next time it happens is another story.

this is right from the horse's mouth:

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. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

All investing is subject to risk, including the possible loss of the money you invest. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

The fund is designed for investors with a low tolerance for risk; however, the fund’s performance could be hurt by:

Income risk: The chance that the fund’s income will decline because of falling interest rates. Because the fund’s income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high.

Manager risk: The chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.

Credit risk: The chance that the issuer of a security will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that security to decline. Credit risk should be very low for the fund because it invests primarily in securities that are considered to be of high quality.

source: https://investor.vanguard.com/investmen ... file/vmfxx

didn't even need to read the prospectus to find that. did you read the prospectus? if not, why not?

[JoMoney]

You can't directly spend out of the Vanguard account. I'm not familiar with Ally's accounts specifically, but I'd guess you can probably link the account to a credit card or some other bill to pay directly via an ACH debit directly from the Savings account. If Ally doesn't offer a debit/ATM card on their savings account, they probably do on a checking account that you can instantly transfer funds to/from the savings even on a weekend.
Vanguard used to offer something called the "VanguardAdvantage" account that gave you an ATM/Debit card and Bill Pay access to your money market fund, but they got rid of that, so whatever cash you hold there, you have to be willing to wait for a transfer to a bank account.

[tasteo]

Have you considered building a 4 week tbill ladder comprised of four 4-week tbills each maturing one week from another and then autorolling them? Current yield is about 2.1% annual. Each week one matures. If reinvesting them then it keeps on going. If you need the money you stop reinvestment and capture back all your $$ within a month maximum and 1/4 of the total each week so it is pretty good liquidity and about a safe as an investment as any. I currently have a ladder comprised of four 4-week tbills held directly at Treasury Direct, but I'm going to transition it to Fidelity one at a time over the course of the next month. Those held in a brokerage account can be sold at any time on the secondary market which confers even better liquidity should a sudden unexpected need for $$ arise. Here's a post about how to construct a ladder comprise of 4-week tbills (see link below). It was written in 2018 when rates were about 1.8%. Again, they're now at around 2.1%. There is a new auction every week on Thursdays. https://www.mymoneyblog.com/how-to-buil ... guide.html

[beyou]

one is fdic insured. the other is not.

money market accounts (at a bank) are fdic insured.

money market mutual funds (like vanguard's) are not.

ally is fdic.

some will pile on and say the money market mutual fund is low risk.

that's fine. it's not fdic insured.

it's important to understand the difference.

money market funds can break the buck.

whether the federal government wants to backstop that the next time it happens is another story.

this is right from the horse's mouth:

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. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

All investing is subject to risk, including the possible loss of the money you invest. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

The fund is designed for investors with a low tolerance for risk; however, the fund’s performance could be hurt by:

Income risk: The chance that the fund’s income will decline because of falling interest rates. Because the fund’s income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high.

Manager risk: The chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.

Credit risk: The chance that the issuer of a security will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that security to decline. Credit risk should be very low for the fund because it invests primarily in securities that are considered to be of high quality.

source: https://investor.vanguard.com/investmen ... file/vmfxx

didn't even need to read the prospectus to find that. did you read the prospectus? if not, why not?

This is an overly simplistic take on the meaning of fdic vs money market funds. FDIC insurance is as valuable as any US govt guarantee, which is to say possibly the best you can get but nothing is 100% assured. Govts do default on obligations, just has not yet happened in the US. If Vanguard sticks to the strategy of the name of the fund “Federal” they mean investing where there is US Federal backed debt. This fund does not invest in lower rated commercial paper etc, only US Tsy debt, tbills, federal agencies (who have similar credit like FDIC) and repos. Repos are simply loans backed by collateral, the collateral generally being US Treasury bonds. This IS as safe as FDIC. If the US gov debt is downgraded, watch out for both the value of FDIC insurance and this (all) Federal fund. Very few money market funds have ever “broken the buck” and it was those that follow a different strategy than THIS Federal fund. I am not generalizing to all money market funds, but the Treasury and Federal are as safe as any bank acct in the US.

Vanguard’s overview on their website.

“The fund invests at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities). As such it is considered one of the most conservative investment options offered by Vanguard”

Note I worked in multiple large and small fund mangers, most recently spending a great deal of time on repos and money market funds. Repos basically loan out your cash and get back more collateral than the amount of the loan. So Vanguard lends your $100 to a broker, the broker may provide back a US tsy worth $101 to the Vanguard mmkt fund. At the end of a term, both parties swap back the cash and the bond. Worst that can happen, broker goes under and Vanguard keeps/sells the US Tsy bond. This is effectively a US gov backing indirectly. After working in the industry for 3 almost 4 decades, I have NO reservations about the relative safety of most money market funds va an FDIC bank acct. And note the strategy must be followed, is audited and monitored by various parties to ensure this is the case. You trust Vanguard to do what they say or go elsewhere, but not to ANY fund company, and accept the arbitrary rates offered by banks. No harm in using a bank if that makes you comfortable, but again almost 40 years in the industry and I trust this type of mmkt fund as much as a bank acct. Any disclaimer by Vanguard is required by law due to technical, not practical reasons.

[Kuna_Papa_Wengi]

Have you considered building a 4 week tbill ladder comprised of four 4-week tbills each maturing one week from another and then autorolling them? Current yield is about 2.1% annual. Each week one matures. If reinvesting them then it keeps on going. If you need the money you stop reinvestment and capture back all your $$ within a month maximum and 1/4 of the total each week so it is pretty good liquidity and about a safe as an investment as any. I currently have a ladder comprised of four 4-week tbills held directly at Treasury Direct, but I'm going to transition it to Fidelity one at a time over the course of the next month. Those held in a brokerage account can be sold at any time on the secondary market which confers even better liquidity should a sudden unexpected need for $$ arise. Here's a post about how to construct a ladder comprise of 4-week tbills (see link below). It was written in 2018 when rates were about 1.8%. Again, they're now at around 2.1%. There is a new auction every week on Thursdays. https://www.mymoneyblog.com/how-to-buil ... guide.html

I've started testing this out with the minimum 100 purchase just to learn the process. I've set it up to reinvest. One question I have is, does it reinvest the entire amount, or is the interest sent back to my checking account?

[tasteo]

Interest gets deposited to your linked bank account if you bought the t bill at Treasury Direct (TD). Here’s an example of my experience with one t bill and the reinvestment after 4 weeks. The first 4-week t bill I purchased ($4000) issued 6/28 with return of 1.116%. TD took $3996.57 from my linked checking account to purchase it. The difference ($3.43) is my interest for that initial t bill. Upon reinvestment on July 26th (I.e. four weeks later) my $4000 t bill was used to purchase a new t bill with a return of 2.153%. So only $3993.33 was used for the purchase. The difference of $6.61 is my interest and it showed up early in the morning on July 26th in my checking account. Easy Peasy. This will go on and on until I stop reinvestments. At which point the $4000 will deposit into my checking account when thing matures.

[Kuna_Papa_Wengi]

Interest gets deposited to your linked bank account if you bought the t bill at Treasury Direct (TD). Here’s an example of my experience with one t bill and the reinvestment after 4 weeks. The first 4-week t bill I purchased ($4000) issued 6/28 with return of 1.116%. TD took $3996.57 from my linked checking account to purchase it. The difference ($3.43) is my interest for that initial t bill. Upon reinvestment on July 26th (I.e. four weeks later) my $4000 t bill was used to purchase a new t bill with a return of 2.153%. So only $3993.33 was used for the purchase. The difference of $6.61 is my interest and it showed up early in the morning on July 26th in my checking account. Easy Peasy. This will go on and on until I stop reinvestments. At which point the $4000 will deposit into my checking account when thing matures.

Thanks, I was hoping that's how it works.

[Northern Flicker]

FDIC insurance is as valuable as any US govt guarantee, which is to say possibly the best you can get but nothing is 100% assured. Govts do default on obligations, just has not yet happened in the US. If Vanguard sticks to the strategy of the name of the fund “Federal” they mean investing where there is US Federal backed debt. This fund does not invest in lower rated commercial paper etc, only US Tsy debt, tbills, federal agencies (who have similar credit like FDIC) and repos.

Most agency debt other than GNMAs are not contractually backed by the Federal govt. In particular, the prospecti for FNMA bonds and FHLMC bonds state explicitly that they are not backed by the full faith and credit of the US Treasury.

The Vanguard Treasury MM fund invests exclusively in instruments backed by the treasury or collateralized by such. It has a longer average maturity, so it takes a little longer to turn over at higher rates when rates rise.

VMFXX is about 12% T-bills, 23% agency debt, and the rest repos. You would have to do a deep dive into the holdings to figure out the percentage of repos that are collateralized by debt fully back by the US treasury.

[beyou]

FDIC insurance is as valuable as any US govt guarantee, which is to say possibly the best you can get but nothing is 100% assured. Govts do default on obligations, just has not yet happened in the US. If Vanguard sticks to the strategy of the name of the fund “Federal” they mean investing where there is US Federal backed debt. This fund does not invest in lower rated commercial paper etc, only US Tsy debt, tbills, federal agencies (who have similar credit like FDIC) and repos.

Most agency debt other than GNMAs are not contractually backed by the Federal govt. In particular, the prospecti for FNMA bonds and FHLMC bonds state explicitly that they are not backed by the full faith and credit of the US Treasury.

The Vanguard Treasury MM fund invests exclusively in instruments backed by the treasury or collateralized by such. It has a longer average maturity, so it takes a little longer to turn over at higher rates when rates rise.

VMFXX is about 12% T-bills, 23% agency debt, and the rest repos. You would have to do a deep dive into the holdings to figure out the percentage of repos that are collateralized by debt fully back by the US treasury.

I don’t need to do a deep dive. Either one is comfortable with SOME risk (agency debt not fully backed, as a small % of their money market fund such as VMFXX) or receive today about 0.40 % less yield in a Tsy only mmkt fund (like VUSXX). VUSXX is comparable to FDIC savings accounts in safety. VMFXX slightly less so, no free lunches. Personally I am OK keeping some $ in the default sweep fund VMFXX but wouldn’t keep too much in such a short term vehicle, of any credit risk, FDIC, US Tsy or otherwise. If you have some short-intermediate term goals, one can fund them better in other Vanguard short term bond funds and pick one that meets your safety comfort level (VGSH and VTIP are as safe as an FDIC insured product, but no need to keep more accounts at more banks to chase the highest teaser savings rate). Yes there is some interest rate risk in such products, but higher yields to compensate, no default risk. If one can’t handle any risk at all, neither rate nor credit risk, VUSXX is the best comparison to fdic bank savings rates. In fact Ally advertises today 1.6% for savings and VUSXX is at 1.67. No free lunches, but more convenience at same level of safety with this fund.

[Northern Flicker]

I don’t need to do a deep dive. Either one is comfortable with SOME risk (agency debt not fully backed, as a small % of their money market fund

The deep dive is to find out what the collateral is for the repos. If, for example, they all are collateralized by agency debt, then the exposure to non-guaranteed agency debt is more like 88%. Most likely a significant fraction of the repos are collateralized by t-bills, but I'm not sure.

It is not about whether one can "handle" the risk, but whether it is appropriate to take the risk. For a longer term and/or medium sized or larger holding, I would use VUSXX.

[beyou]

I don’t need to do a deep dive. Either one is comfortable with SOME risk (agency debt not fully backed, as a small % of their money market fund

The deep dive is to find out what the collateral is for the repos. If, for example, they all are collateralized by agency debt, then the exposure to non-guaranteed agency debt is more like 88%. Most likely a significant fraction of the repos are collateralized by t-bills, but I'm not sure.

Well the holdings page in the Vanguard site shows the 1st 2 holdings categorized as “Treasury REPO”, and as I said already above, the vast majority of repo trading is backed with US Tsy bonds so that was no surprise. Finally, even if one negotiates a repo with some other collateral, there is plenty of margin for error as a “haircut” is defined based on market perceived credit risk, so a riskier collateral issue would require over-collateralization. Not that this is 100% foolproof, but it is also not very common, would be a tiny % of portfolio if any at all. If there is greater risk in VMFXX over VUSXX it is the fact there are indeed some directly held agency securities (not just repos) that do add some non full faith and credit but still gov agency backing. This is easy to find on the website. And it should ALWAYS be assumed, higher yield on a fixed income fund means some combo of difference in er and risk. VMFXX and VUSXX have 0.40 difference and this is NOT explained by exp ratio, hence it is explained by risk differences.

The way to look at a mmkt (or bond fund) is that it is a mixture of risk and reward in a package. If one is not willing to read the fund strategy and holdings, one should not be comfortable investing in ANY funds at all, going in blind. Then yeah, stick with FDIC bank accounts and earn same or less in a possibly less convenient manner (keep switching banks when they play games with rates, vs have Vanguard continually shop for rates inside the fund).

[MikeG62]

I for one am not worried about risk in these high quality MMF's run by large broker dealers. I've lived through a number of financial crises (2008 and 2020 as two most recent examples) and there was tons of handwriting on the wall long before things got dicey.

Jeez, there is risk every time we leave the house. But that does not cause me to stay inside .

[anon_investor]

I for one am not worried about risk in these high quality MMF's run by large broker dealers. I've lived through a number of financial crises (2008 and 2020 as two most recent examples) and there was tons of handwriting on the wall long before things got dicey.

Jeez, there is risk every time we leave the house. But that does not cause me to stay inside .

+1. In 2008, how many MMFs actually broke the buck? None did in 2020.

[H-Town]

one is fdic insured. the other is not.

money market accounts (at a bank) are fdic insured.

money market mutual funds (like vanguard's) are not.

ally is fdic.

some will pile on and say the money market mutual fund is low risk.

that's fine. it's not fdic insured.

it's important to understand the difference.

money market funds can break the buck.

whether the federal government wants to backstop that the next time it happens is another story.

this is right from the horse's mouth:

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. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

All investing is subject to risk, including the possible loss of the money you invest. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

The fund is designed for investors with a low tolerance for risk; however, the fund’s performance could be hurt by:

Income risk: The chance that the fund’s income will decline because of falling interest rates. Because the fund’s income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high.

Manager risk: The chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.

Credit risk: The chance that the issuer of a security will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that security to decline. Credit risk should be very low for the fund because it invests primarily in securities that are considered to be of high quality.

source: https://investor.vanguard.com/investmen ... file/vmfxx

didn't even need to read the prospectus to find that. did you read the prospectus? if not, why not?

I read the prospectus of every fund that I invest in. The devil is in the details. The fund has to include disclosure to comply with regulatory requirements. Look further into its holding. Their investments are as safe as it gets.

Do you trust T-Bills? Do you invest in IBonds?

The real risk of money market and bank account is the risk of losing purchasing power over a period of time. And that is almost a guarantee.

[Northern Flicker]

I for one am not worried about risk in these high quality MMF's run by large broker dealers. I've lived through a number of financial crises (2008 and 2020 as two most recent examples) and there was tons of handwriting on the wall long before things got dicey.

Jeez, there is risk every time we leave the house. But that does not cause me to stay inside :oops:.

+1. In 2008, how many MMFs actually broke the buck? None did in 2020.

In 2008/2009 there was aggressive Fed intervention in commercial paper markets, and subsidies of MMF's by providers in both 2008/2009 and 2020 until recently (not enough interest to cover expenses when t-bills pay 1 bp). Without those things in play, a fair number would have broken the buck. That is great, but it is not the contractual guarantee you get with FDIC/NCUA insurance or treasuries or GNMAs. For me, it boils down to the purpose of the funds and the amount. If it is an emergency fund, I would stick to govt insured accounts or treasury MMFs. You want an emergency fund to be available in the direst of circumstances.

[anon_investor]

I for one am not worried about risk in these high quality MMF's run by large broker dealers. I've lived through a number of financial crises (2008 and 2020 as two most recent examples) and there was tons of handwriting on the wall long before things got dicey.

Jeez, there is risk every time we leave the house. But that does not cause me to stay inside .

+1. In 2008, how many MMFs actually broke the buck? None did in 2020.

In 2008/2009 there was aggressive Fed intervention in commercial paper markets, and subsidies of MMF's by providers in both 2008/2009 and 2020 until recently (not enough interest to cover expenses when t-bills pay 1 bp). Without those things in play, a fair number would have broken the buck. That is great, but it is not the contractual guarantee you get with FDIC/NCUA insurance or treasuries or GNMAs.

Were treasury/government MMFs more immune?

[Northern Flicker]

Immune to the liquidity squeeze in commercial paper, yes. Short-term agency debt could have more liquidity problems than treasuries. GNMAs retained much more liquidity than other MBS in 2008/2009 presumably due to the credit backing of the Treasury. This was a credit crisis after all.

Not being able to cover expenses was a general problem, but the 2bp lower ER of VUSXX relative to VMFXX would be a plus there.

[anon_investor]

Immune to the liquidity squeeze in commercial paper, yes. Short-term agency debt could have mire liquidity problems than treasuries. GNMAs retained much more liquidity than other MBS in 2008/2009 presumably due to the credit backing of the Treasury. This was a credit crisis after all.

Not being able to cover expenses was a general problem, but the 2bp lower ER of VUSXX relative to VMFXX would be a plus there.

Rolling short term treasuries would obviously be the safest, but wouldn't VUSXX be almost as safe since it only holds treasuries?

[UpperNwGuy]

If it is an emergency fund, I would stick to govt insured accounts or treasury MMFs. You want sn emergency fund to be available in the direst of circumstances.

That's one approach, and it's a very conservative approach. I happen to favor accepting a little bit more risk, so I'm willing to hold VMFXX and VMRXX as well as VUSXX.

[Ben Ploni]

Unless you live in CA, CT or NY; since it is unlikely VMFXX will meet those states requirements for state/local tax exemption.

Can you please explain that? What's different about those three states that would prevent benefiting from the SALT exemption?

[anon_investor]

Unless you live in CA, CT or NY; since it is unlikely VMFXX will meet those states requirements for state/local tax exemption.

Can you please explain that? What's different about those three states that would prevent benefiting from the SALT exemption?

Those states require that at least 50% of the interest comes from US Treasuries. Most of VMFXX's interest currently comes from repurchase agreements not US Treasuries.

[increment]

I read the prospectus of every fund that I invest in. The devil is in the details. The fund has to include disclosure to comply with regulatory requirements. Look further into its holding. Their investments are as safe as it gets.

Do you trust T-Bills? Do you invest in IBonds?

Maybe one trusts Treasury bills, but less so the government-sponsored enterprises whose bonds make up a substantial proportion of the Federal MMF's assets. Those bonds do not enjoy the "full faith and credit of the U.S. government."

[Ben Ploni]

Unless you live in CA, CT or NY; since it is unlikely VMFXX will meet those states requirements for state/local tax exemption.

Can you please explain that? What's different about those three states that would prevent benefiting from the SALT exemption?

Those states require that at least 50% of the interest comes from US Treasuries. Most of VMFXX's interest currently comes from repurchase agreements not US Treasuries.

Damn it. Thanks for the info.

[anon_investor]

Unless you live in CA, CT or NY; since it is unlikely VMFXX will meet those states requirements for state/local tax exemption.

Can you please explain that? What's different about those three states that would prevent benefiting from the SALT exemption?

Those states require that at least 50% of the interest comes from US Treasuries. Most of VMFXX's interest currently comes from repurchase agreements not US Treasuries.

Damn it. Thanks for the info.

This wasnt the case the last few years when 70%+ came from US Treasuries. Now repurchase agreements just pay too well for the managers of VFMXX to pass up I guess.

[Northern Flicker]

Immune to the liquidity squeeze in commercial paper, yes. Short-term agency debt could have mire liquidity problems than treasuries. GNMAs retained much more liquidity than other MBS in 2008/2009 presumably due to the credit backing of the Treasury. This was a credit crisis after all.

Not being able to cover expenses was a general problem, but the 2bp lower ER of VUSXX relative to VMFXX would be a plus there.

Rolling short term treasuries would obviously be the safest, but wouldn't VUSXX be almost as safe since it only holds treasuries?

I don't see an issue with VUSXX. If rates went to zero and Vanguard did not want to, or could not cover the admin cost, they could just close and liquidate the fund, and return cash to investors.

[beyou]

I read the prospectus of every fund that I invest in. The devil is in the details. The fund has to include disclosure to comply with regulatory requirements. Look further into its holding. Their investments are as safe as it gets.

Do you trust T-Bills? Do you invest in IBonds?

Maybe one trusts Treasury bills, but less so the government-sponsored enterprises whose bonds make up a substantial proportion of the Federal MMF's assets. Those bonds do not enjoy the "full faith and credit of the U.S. government."

This is a mostly academic concern. During the financial crisis of a decade ago, the US bailed out FNMA and FHLMC despite not having “full faith and credit”. If the US govt did not do so, we’d have had bigger problems. This and similar federal money market funds did just fine through that crisis. The only mmkt funds that failed were those that buy corp debt, such as commercial paper, something VMFXX cannot do. If one can’t sleep well with the small doubt then there is VUSXX, where you get bank-like rates and FDIC-like safety. Personally if Vanguard allowed choice of settlement accounts, I would consider VUSXX but if the use of vmfxx bothered me, rather than transfer to HYSA and chase rates, I would just buy some VUSXX. Though I do not think one should keep too much in ANY mmkt funds nor HYSA. I consider mmkt as a portion of my emergency fund savings only. short TIPS, short treasuries and savings bonds should be part of such strategy. I include savings bonds not HYSA since if I am going to suffer the inconvenience of moving $ to another institution, Savings bonds generally beat HYSA, at same safety level, a true free lunch.

[JoMoney]

FNMA and FHLMC mortgage backed securities are explicitly required to state they DO NOT have the "full faith and credit" government backing... That said, there is a sometimes problematic "implicit guarantee" backing these bonds, despite being pseudo-public companies, they were chartered by congress to serve a function in the mortgage/home-ownership market. If they were allowed to fail it would (likely) cause reactions in the mortgage market counter to what congress had chartered these companies to do, the interest rates would go sky-high without the wide-spread belief of an "implicit" backing (despite the explicit no-government-backing, it was demonstrated to be the case in the 2008 financial crisis.) The amount of debt in these MBS instruments is so large, it would impact the Federal Reserves ability to do their function managing the money supply if they didn't also actively participate in this "implicit" backing that is by law required to explicitly say is not there.

[beyou]

FNMA and FHLMC mortgage backed securities are explicitly required to state they DO NOT have the "full faith and credit" government backing... That said, there is a sometimes problematic "implicit guarantee" backing these bonds, despite being pseudo-public companies, they were chartered by congress to serve a function in the mortgage/home-ownership market. If they were allowed to fail it would (likely) cause reactions in the mortgage market counter to what congress had chartered these companies to do, the interest rates would go sky-high without the wide-spread belief of an "implicit" backing (despite the explicit no-government-backing, it was demonstrated to be the case in the 2008 financial crisis.) The amount of debt in these MBS instruments is so large, it would impact the Federal Reserves ability to do their function managing the money supply if they didn't also actively participate in this "implicit" backing that is by law required to explicitly say is not there.

All the US agencies exist to serve some purpose that meets a need supported by the US government. Or they would be shut down, and stop issuing new debt. And the smaller agencies would be easily bailed out if need be, not the same level of debate needed as a larger bailout as occurred with FNMA, FHLMC.

[anon_investor]

I thought money market funds that are classified as "government money market funds" (like VMFXX is) are supposed to be a lot safer now than money market funds in 2008 because they must maintain a high level of liquidity and a bunch of other rule changes.

[augryphon]

How do I compare Vanguard Federal MM (VMFXX - SEC 7 day yield 2.08%) to Ally Savings (currently 1.6%)? How do you compare the two percentages listed for highest yield on cash? (Bang for Buck) Saw VMFXX has a 0.11% expense ratio. Going to start savings for home deposit for purchase in the next few years. Thanks in advance.

Both are fine, if your starting at 0 the difference is negligible.

[beyou]

I thought money market funds that are classified as "government money market funds" (like VMFXX is) are supposed to be a lot safer now than money market funds in 2008 because they must maintain a high level of liquidity and a bunch of other rule changes.

The new rules are not going to address the concerns in this discussion. The rules related to the ability to redeem at other than $1/share (for institutional finds that you may find in a 401k), and the need for liquidity with provision to restrict withdrawals when liquidity falls below a level. Note an FDIC bank failure would also result in temporary restriction from accessing your deposit. FDIC insurance does not bailout instantly, but eventually within a reasonable timeframe. Same is true for SIPC and most insurance payouts. This rule is just giving mmkt funds time and methods to work out serious problems as all other forms of protection out there.

As to this being a gov fund, yes but there are Treasury-only vs Treasury and Agency funds. Treasury only would certainly be less likely to have any event. Some agency securities have only an assumed/implied level of safety, not a legal written level of safety. But imagine of US agencies were failing, do you think they might do something about it ? Wait, they already did in the past.

Amazes me the level of concern yet people use Total Bond with much riskier corporate issuers, and equity funds. All return involves some risk, one must understand the realistic level of risk and potential rewards. People tend to overstate the risk here VMFXX and understate other risks on these discussions.

[anon_investor]

I thought money market funds that are classified as "government money market funds" (like VMFXX is) are supposed to be a lot safer now than money market funds in 2008 because they must maintain a high level of liquidity and a bunch of other rule changes.

The new rules are not going to address the concerns in this discussion. The rules related to the ability to redeem at other than $1/share (for institutional finds that you may find in a 401k), and the need for liquidity with provision to restrict withdrawals when liquidity falls below a level. Note an FDIC bank failure would also result in temporary restriction from accessing your deposit. FDIC insurance does not bailout instantly, but eventually within a reasonable timeframe. Same is true for SIPC and most insurance payouts. This rule is just giving mmkt funds time and methods to work out serious problems as all other forms of protection out there.

As to this being a gov fund, yes but there are Treasury-only vs Treasury and Agency funds. Treasury only would certainly be less likely to have any event. Some agency securities have only an assumed/implied level of safety, not a legal written level of safety. But imagine of US agencies were failing, do you think they might do something about it ? Wait, they already did in the past.

Amazes me the level of concern yet people use Total Bond with much riskier corporate issuers, and equity funds. All return involves some risk, one must understand the realistic level of risk and potential rewards. People tend to overstate the risk here VMFXX and understate other risks on these discussions.

I have a Federated Hermes "treasury" money market fund, but its holdings are not exclusively Treasuries, it has some repurchase agreements fully collateralized by treasuries. I treat that as good enough.

I also feel VMFXX is safe enough.

[Northern Flicker]

I thought money market funds that are classified as "government money market funds" (like VMFXX is) are supposed to be a lot safer now than money market funds in 2008 because they must maintain a high level of liquidity and a bunch of other rule changes.

They are more regulated now. Funds that do not meet certain restrictions have to have a liquidity gate where they can restrict withdrawals if requests for withdrawals exceed the ability of the fund to meet them. VMFXX Federal MM was designed to meet those requirements without a liquidity gate.

VUSXX has at times had a little longer average maturity than VMFXX but it only is 5 days longer today. In a time of great financial duress, this could lead to a somewhat longer time to receive your cash back if it required liquidation by letting instruments mature.

Ultimately, any decision to backstop the credit of Freddie and Fannie instruments by the govt is a policy decision not a contractual obligation.

VMFXX is very safe, just a little less safe than VUSXX, and less tax-efficient in a taxable account if your state taxes income. Now that the average maturity of VUSXX is dropping to be close to that of VFMXX the question may become moot-- VUSXX should start to incorporate rate increases fast enough for the yield to match or slightly exceed the yield of VMFXX in the near future.

[anon_investor]

I thought money market funds that are classified as "government money market funds" (like VMFXX is) are supposed to be a lot safer now than money market funds in 2008 because they must maintain a high level of liquidity and a bunch of other rule changes.

They are more regulated now. Funds that do not meet certain restrictions have to have a liquidity gate where they can restrict withdrawals if requests for withdrawals exceed the ability of the fund to meet them. VMFXX Federal MM was designed to meet those requirements.

VUSXX has at times had a little longer average maturity than VMFXX but it only is 5 days longer today. In a time of great financial duress, this could lead to a somewhat longer time to receive your cash back if it required liquidation by letting instruments mature.

Ultimately, any decision to backstop the credit of Freddie and Fannie instruments by the govt is a policy decision not a contractual obligation.

Are repurchase agreements fully collateralized by US Treasuries more iron clad?

[Northern Flicker]

I don't worry about any differences between a t-bill and a repo collateralized by a t-bill. Liquidity risk may not be identical. But repos are very short term, so it would not take long for an insolvent counterparty to default officially and cough up the collateral.

[HENRYGRUGER]

one is fdic insured. the other is not.

money market accounts (at a bank) are fdic insured.

money market mutual funds (like vanguard's) are not.

ally is fdic.

some will pile on and say the money market mutual fund is low risk.

that's fine. it's not fdic insured.

it's important to understand the difference.

money market funds can break the buck.

whether the federal government wants to backstop that the next time it happens is another story.

this is right from the horse's mouth:

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. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

All investing is subject to risk, including the possible loss of the money you invest. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

The fund is designed for investors with a low tolerance for risk; however, the fund’s performance could be hurt by:

Income risk: The chance that the fund’s income will decline because of falling interest rates. Because the fund’s income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high.

Manager risk: The chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.

Credit risk: The chance that the issuer of a security will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that security to decline. Credit risk should be very low for the fund because it invests primarily in securities that are considered to be of high quality.

source: https://investor.vanguard.com/investmen ... file/vmfxx

didn't even need to read the prospectus to find that. did you read the prospectus? if not, why not?

This is an overly simplistic take on the meaning of fdic vs money market funds. FDIC insurance is as valuable as any US govt guarantee, which is to say possibly the best you can get but nothing is 100% assured. Govts do default on obligations, just has not yet happened in the US. If Vanguard sticks to the strategy of the name of the fund “Federal” they mean investing where there is US Federal backed debt. This fund does not invest in lower rated commercial paper etc, only US Tsy debt, tbills, federal agencies (who have similar credit like FDIC) and repos. Repos are simply loans backed by collateral, the collateral generally being US Treasury bonds. This IS as safe as FDIC. If the US gov debt is downgraded, watch out for both the value of FDIC insurance and this (all) Federal fund. Very few money market funds have ever “broken the buck” and it was those that follow a different strategy than THIS Federal fund. I am not generalizing to all money market funds, but the Treasury and Federal are as safe as any bank acct in the US.

Vanguard’s overview on their website.

“The fund invests at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities). As such it is considered one of the most conservative investment options offered by Vanguard”

Note I worked in multiple large and small fund mangers, most recently spending a great deal of time on repos and money market funds. Repos basically loan out your cash and get back more collateral than the amount of the loan. So Vanguard lends your $100 to a broker, the broker may provide back a US tsy worth $101 to the Vanguard mmkt fund. At the end of a term, both parties swap back the cash and the bond. Worst that can happen, broker goes under and Vanguard keeps/sells the US Tsy bond. This is effectively a US gov backing indirectly. After working in the industry for 3 almost 4 decades, I have NO reservations about the relative safety of most money market funds va an FDIC bank acct. And note the strategy must be followed, is audited and monitored by various parties to ensure this is the case. You trust Vanguard to do what they say or go elsewhere, but not to ANY fund company, and accept the arbitrary rates offered by banks. No harm in using a bank if that makes you comfortable, but again almost 40 years in the industry and I trust this type of mmkt fund as much as a bank acct. Any disclaimer by Vanguard is required by law due to technical, not practical reasons.

Outstanding post "beyou." Full of insights and civil in tone.

I continue to fail to understand why folks feel speaking to others on a bulletin board in a condescending manner is appropriate?

To consider FDIC insurance superior to VMFXX is certainly someone's right to do, but financially, it is not only simplistic, but in my opinion, a type of red herring.

[Northern Flicker]

In normal circumstances, you are correct. In the direst of situations, maybe not. I use VMFXX has a place for assets to sit waiting to be invested or waiting to be spent. I would use VUSXX for a long-term cash holding like an emergency fund or cash allocation in a portfolio if I had either.

[MikeG62]

I for one am not worried about risk in these high quality MMF's run by large broker dealers. I've lived through a number of financial crises (2008 and 2020 as two most recent examples) and there was tons of handwriting on the wall long before things got dicey.

Jeez, there is risk every time we leave the house. But that does not cause me to stay inside .

+1. In 2008, how many MMFs actually broke the buck? None did in 2020.

In 2008/2009 there was aggressive Fed intervention in commercial paper markets, and subsidies of MMF's by providers in both 2008/2009 and 2020 until recently (not enough interest to cover expenses when t-bills pay 1 bp). Without those things in play, a fair number would have broken the buck...

That is true for the reasons you indicated. I cannot imagine a reasonable scenario where the Fed and the providers of the MMF's would not do the same thing if it were needed in the future and I am not going to invest assuming they would not.

Add in that when trouble comes, there is a ton of handwriting on the wall. That provides plenty of time for one to move funds around if they became worried.

Let me give an example. In 2019 and early 2020 I had several hundred grand in ICSH (part of the short-end of my fixed income exposure). Things began to get squirrely with the Pendemic in Feb and early March. Lot's of handwriting on the wall so to speak. As a result, in late Feb 2020 I sold all of my holdings in ICSH and moved the funds to very short-term Treasuries. Second week of March, ICSH declined by several hundred bps.

[Northern Flicker]

There was no guarantee that you would be able to liquidate from ICSH before liquidity risk materialized, bringing down the price. I don't think it is common to view an emergency fund as something that is invested with some risk, and that is monitored to try to bail from it quickly if it looks like the risk will materialize.

[Northern Flicker]

Vanguard publishes a report of daily liquid assets for VMFXX. This may be a requirement under the new rules post-2008 for funds without a liquidity gate. VMFXX has fluctuated between 78% and 82% suggesting a target of or about 80%. This may be a reasonable measure of the percentage allocation to the combination of treasuries and repos backed by treasuries.

[William4u]

How do I compare Vanguard Federal MM (VMFXX - SEC 7 day yield 2.08%) to Ally Savings (currently 1.6%)? How do you compare the two percentages listed for highest yield on cash? (Bang for Buck) Saw VMFXX has a 0.11% expense ratio. Going to start savings for home deposit for purchase in the next few years. Thanks in advance.

It is actually even better than that to be in VMFXX. In addition to the higher yield, about 50% of VMFXX is excluded from state taxes. 100% of Ally interest is state taxed.

[patrick]

Ally is not even in the top 20 savings accounts, see https://www.doctorofcredit.com/high-int ... gs-to-get/