VMFXX Money Market- Safe? Insured? or go with FDIC insured?

[roguewarrior0]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

[sport]

I have no concern that the US govt. will default on its obligations. After all, they will want to borrow more in the future. I have money in VMFXX and do not worry about it at all.

[RadAudit]

How much risk are you willing to accept?

To my way of thinking, FDIC is safer; but, I doubt if VMFXX is that much riskier. But, if it is a concern, why take the risk?

[Nate79]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

Who do you think is backing that FDIC? It's all being backed by the govt. If they default nothing is safe.

[anon_investor]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

Who do you think is backing that FDIC? It's all being backed by the govt. If they default nothing is safe.

+1.

[sport]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

Who do you think is backing that FDIC? It's all being backed by the govt. If they default nothing is safe.

Not only that, but the govt. owns the printing press. They would have no need to default. They can print all the money they need.

[roguewarrior0]

Sounds like stick with VMFXX.

thanks everyone.

[metalworking]

Doubt it will last long but Discover savings account is 1.5% and 12 month CD 1.75%. Not sure of the advantage of staying in VMFXX unless convenience is a factor

[biscuit5]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

old thread but in current environment with bank failures the norm on daily news, good question.

[roguewarrior0]

I still have this question. I would like to hold more cash but default is worrisome

[ehh]

You may wish to pursue this recent thread: viewtopic.php?t=399687

[chinchin]

I still have this question. I would like to hold more cash but default is worrisome

Are you stocking up on food, water and ammo? And barter-able goods?

[JackoC]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

Who do you think is backing that FDIC? It's all being backed by the govt. If they default nothing is safe.

The risk of VMFXX or insured deposits is very small and very similar IMO. However, among a couple of small/indeterminate risks are more for VMFXX vs. FDIC insured deposits:
-a 'technical' default by the government over 'debt ceiling' could at least temporarily gum up the works for redeeming money market funds full of govt issues (especially the more T-bill heavy, though *generally* even safer VUSXX). It wouldn't immediately cause mass bank failures.

-VMFXX isn't the component debt instruments literally in your hands, it's a fund run by Vanguard shares of which held for you at Vanguard Brokerage Services. There are indeterminate 'unknown unknown' risks to that, especially within the fund which isn't necessarily covered by SIPC insurance as the shares of the fund are. FDIC pays you for any reason the bank can't.

That's besides the fact that not nearly all of VMFXX is direct debt of the US govt (almost all of VUSXX usually is and rest usually mainly repo transactions w/ Federal Reserve as counterparty). Although most of the other stuff in VMFXX besides T-bills is commonly viewed by the market as de facto US govt gteed, or repo's (though the counterparties aren't limited to the Fed).

Going the other way, one might argue whether funding the FDIC could have lower priority than paying the debt, in the extreme. I think actually that could go the other way, *in the extreme*, mom and pop might beat out 'rich investors and foreigners' no matter what constitutional arguments anyone gives now that the debt must come first. It's up to Congress, and courts only pass judgment when the toothpaste is already out of the tube.

Summary, tiny risk, no real worries either way, no reason to be more worried right now than a couple of weeks ago, all IMO. But it's a fact there's no law against having some money in each.

[VartAndelay]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

Who do you think is backing that FDIC? It's all being backed by the govt. If they default nothing is safe.

The risk of VMFXX or insured deposits is very small and very similar IMO. However, among a couple of small/indeterminate risks are more for VMFXX vs. FDIC insured deposits:
-a 'technical' default by the government over 'debt ceiling' could at least temporarily gum up the works for redeeming money market funds full of govt issues (especially the more T-bill heavy, though *generally* even safer VUSXX). It wouldn't immediately cause mass bank failures.

-VMFXX isn't the component debt instruments literally in your hands, it's a fund run by Vanguard shares of which held for you at Vanguard Brokerage Services. There are indeterminate 'unknown unknown' risks to that, especially within the fund which isn't necessarily covered by SIPC insurance as the shares of the fund are. FDIC pays you for any reason the bank can't.

That's besides the fact that not nearly all of VMFXX is direct debt of the US govt (almost all of VUSXX usually is and rest usually mainly repo transactions w/ Federal Reserve as counterparty). Although most of the other stuff in VMFXX besides T-bills is commonly viewed by the market as de facto US govt gteed, or repo's (though the counterparties aren't limited to the Fed).

Going the other way, one might argue whether funding the FDIC could have lower priority than paying the debt, in the extreme. I think actually that could go the other way, *in the extreme*, mom and pop might beat out 'rich investors and foreigners' no matter what constitutional arguments anyone gives now that the debt must come first. It's up to Congress, and courts only pass judgment when the toothpaste is already out of the tube.

Summary, tiny risk, no real worries either way, no reason to be more worried right now than a couple of weeks ago, all IMO. But it's a fact there's no law against having some money in each.

What exactly would happen to T-Bills during a technical default?

[JackoC]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

Who do you think is backing that FDIC? It's all being backed by the govt. If they default nothing is safe.

The risk of VMFXX or insured deposits is very small and very similar IMO. However, among a couple of small/indeterminate risks are more for VMFXX vs. FDIC insured deposits:
-a 'technical' default by the government over 'debt ceiling' could at least temporarily gum up the works for redeeming money market funds full of govt issues (especially the more T-bill heavy, though *generally* even safer VUSXX). It wouldn't immediately cause mass bank failures.

-VMFXX isn't the component debt instruments literally in your hands, it's a fund run by Vanguard shares of which held for you at Vanguard Brokerage Services. There are indeterminate 'unknown unknown' risks to that, especially within the fund which isn't necessarily covered by SIPC insurance as the shares of the fund are. FDIC pays you for any reason the bank can't.

That's besides the fact that not nearly all of VMFXX is direct debt of the US govt (almost all of VUSXX usually is and rest usually mainly repo transactions w/ Federal Reserve as counterparty). Although most of the other stuff in VMFXX besides T-bills is commonly viewed by the market as de facto US govt gteed, or repo's (though the counterparties aren't limited to the Fed).

Going the other way, one might argue whether funding the FDIC could have lower priority than paying the debt, in the extreme. I think actually that could go the other way, *in the extreme*, mom and pop might beat out 'rich investors and foreigners' no matter what constitutional arguments anyone gives now that the debt must come first. It's up to Congress, and courts only pass judgment when the toothpaste is already out of the tube.

Summary, tiny risk, no real worries either way, no reason to be more worried right now than a couple of weeks ago, all IMO. But it's a fact there's no law against having some money in each.

What exactly would happen to T-Bills during a technical default?

I don't think anyone really knows exactly what would happen. But if the govt isn't allowed to issue new debt to roll over old debt, and doesn't somehow prioritize debt payments over others (a debate with political implications probably best not to get into a lot more), it's possible those funds wouldn't be able to turn enough T-bills into cash to make redemptions, and would put a hold on redemptions till the 'technical' issue was resolved. It would seem possible, whereas banks probably less likely to be directly immediately affected by such an event since no rule or law preventing the Fed from lending banks money using treasuries (owned by banks) as collateral, even though those treasuries were temporarily not paying. It's anyway a bit of difference in risk to this kind of event between banks and 'federal' MM funds. In general tiny risks in my view, but slightly different between the two, which could be a reason to have some money in both things if absolute simplicity isn't an extremely high priority.

[VartAndelay]

it's possible those funds wouldn't be able to turn enough T-bills into cash to make redemptions, and would put a hold on redemptions till the 'technical' issue was resolved.

So in this hypothetical possibility, the technical default could still eventually resolve and T-Bill holders could be made whole again? So the T-Bills would not necessarily permanently go to 0 in the event of a technical default?

This stuff is difficult to wrap my head around. I have a hard time seeing how T-Bills could be in crisis mode without that being absolutely catastrophic for all of finance and the economy as a whole.

[btq96r]

If VMFXX isn't safe, the economy as a whole is already ash because the credibility of the US government is cooked. if VUSXX isn't safe, nothing aside from chickens on a farm and seeds are safe as an investment.

We really need to understand the leagues of difference in risk between the money market holdings of US government products and a bank that was effectively a business to business service with little and less risk management. I get the usefulness of gaming out where money is safe in a near catastrophic model, but the fallback of VUSXX and VMFXX are the last lines of defense. If they ain't safe, your bank deposit guarantees from the government aren't either.

[VartAndelay]

If VMFXX isn't safe, the economy as a whole is already ash because the credibility of the US government is cooked. if VUSXX isn't safe, nothing aside from chickens on a farm and seeds are safe as an investment.

We really need to understand the leagues of difference in risk between the money market holdings of US government products and a bank that was effectively a business to business service with little and less risk management. I get the usefulness of gaming out where money is safe in a near catastrophic model, but the fallback of VUSXX and VMFXX are the last lines of defense. If they ain't safe, your bank deposit guarantees from the government aren't either.

Where do directly held T-Bills fall in this hierarchy?

[btq96r]

Where do directly held T-Bills fall in this hierarchy?

Essentially the same as VUSXX, just without the middleman getting 0.09% ER.

[UpperNwGuy]

I would go with VMFXX rather than FDIC insured. Both of them fall into the category of "very safe parking lots for your money," but VMFXX currently has better yields.

[chinchin]

FDIC invests its reserves in T-bills.

[JackoC]

it's possible those funds wouldn't be able to turn enough T-bills into cash to make redemptions, and would put a hold on redemptions till the 'technical' issue was resolved.

So in this hypothetical possibility, the technical default could still eventually resolve and T-Bill holders could be made whole again? So the T-Bills would not necessarily permanently go to 0 in the event of a technical default?

This stuff is difficult to wrap my head around. I have a hard time seeing how T-Bills could be in crisis mode without that being absolutely catastrophic for all of finance and the economy as a whole.

It does not seem *that* remote a possibility that a political standoff over the debt ceiling could result in the Treasury being temporarily unable to pay off its obligations. Yet it seems a more remote possibility that such a situation could persist for long, and if the political standoff were resolved things might go back towards normal quickly. But there's again no way to predict if the 'technical default' scenario will actually occur, or that it wouldn't turn into a much bigger problem if it did.

[Kbg]

A full prospectus is dull a thing to read but near the front is a list of risks and descriptions of them. If one wants a good thorough list of risks, that's the place to go.

A described risk is not a realized risk, but these documents are pretty good at thinking of everything that could possibly go wrong with an investment.

[patrick]

Right now you can get 5.02% FDIC insured at UFB which is higher than money market fund rates.

[JackoC]

I would go with VMFXX rather than FDIC insured. Both of them fall into the category of "very safe parking lots for your money," but VMFXX currently has better yields.

This is a solid objective reason to relatively favor VMFXX/VUSXX right now over bank savings accounts, though depending on state tax bracket (especially wrt VUSXX) and how furiously you'd chase the absolute highest bank/CU savings account rate, constantly changing accounts. This wasn't true prior to the current Fed tightening cycle, it isn't always, but is now.

However on risk hierarchy, the idea that banks 'fall' strictly before there's any problem with federal MM funds is much fuzzier. There could be a technical government default. It could cause trouble for MM fund redemptions at least temporarily. Saying this would have to also affect banks because 'everything turns to ash' I think must be affected by the political debate where one side emphasizes the lurid possibilities on the downside. I'm not passing judgement on any political arguments about that situation either way. Just saying the idea that banks must fail (and moreover FDIC not pay off <$250k depositors immediately) before there's any problem with MM funds in any possible scenario is a stretch IMO.

My policy is keep a bit of cash in FDIC insured account, some weeks' expenses worth, though the bulk of cash is currently in VUSXX, because of the rate. And I view the near term risk, especially 'deep risk' of a big permanent loss, as very small in either case. Moreover though I keep some money in term CD's mainly because I can sometimes buy them at much better rates than treasuries (eg. yesterday I funded a 5.5% 35 mo CD with the interpolated treasury point at 3.69%), it also *slightly* diversifies credit risk in my view. The bank also owes you the money, and I don't believe all possible scenario's see all banks failing before politicians decide 'fat cats and foreigners' who own most treasury $'s have to take a haircut as their 'fair share' of resolving what turns out unsustainable federal debt. FDIC depositors are 'widows and orphans', there could be benefit hanging out with them. And it's not Olympian wisemen/women who would make that decision if it came, but politicians perhaps worse than the ones we have now. Not that I think things are going to hell necessarily, or that I'll sail through unscathed if they do by having some FDIC and some treasury, or that the FDIC/bank system couldn't possibly collapse first. It's just a bit of diversification. If I'm presented with the choice of AAA corporate issuers A and B, two companies in same country and similar business offering the same rate, is the right approach to carefully analyze who is the *slightly* better credit on average across all possible scenarios and put 100% into that one, or do some of both?

[nisiprius]

Questions of ultimate safety are pretty sterile, because the situations which would make these vehicles unsafe are too rare to analyze statistically, each one is unique, and each one is normally followed by changes intended to make them safer.

Money market mutual funds like VMFXX are not insured. They are intrinsically pretty safe based on a) what they invest in, b) regulation, and c) the protections of all mutual funds and ETFs under the Investment Company Act of 1940.

But obviously they are not as safe as an FDIC-insured bank account.

One piece of evidence for this is that a money market mutual fund, the Reserve Primary fund, collapsed in 2008. Ultimately the investors got something like 99% of their money back, but it was many months before they saw anything at all, and the full process took about two and a half years. I don't know what is the worst case for an FDIC-insured bank account, but typically the FDIC takes care of it over a weekend and there's almost no inconvenience to to depositors.

VMFXX is almost certainly safer than the Reserve Primary fund was. What brought Reserve Primary down was investments in commercial paper, and VMFXX doesn't do that. It is also almost certainly safer because after Reserve Primary, there were reforms and regulations that changed the way money market funds operate. Among other things, they divided money market funds into two categories, "retail" and "institutional." VMFXX is "retail." If Reserve Primary still existed, it would be "institutional." The institutional funds are slightly riskier, and are now required to state a very-slightly-fluctuating value (NAV) based on the very slightly fluctuating assets it holds, rather than having a NAV of exactly one dollar per share.

The point is that with a money market fund, if you are really concerned about ultimate safety, you are supposed to look into the particulars of the fund: extremely safe or just "safe?" But with a bank account, once you see the FDIC logo you don't need to look any further (assuming you're within the insurance limit). All bank accounts that are fully insured by the FDIC are as safe as the FDIC, regardless of the bank's financial condition, and the FDIC is backed by the full faith and credit of the US government. (NCUA, which insures credit unions, ditto).

A sane person could decide that in a completely unprecedented deep financial crisis, money market mutual funds and bank accounts are so different that they are exposed to different risks, and I suppose some people might argue that having some money in each kind of vehicle might serve as a backstop.

It is extremely confusing that banks offer products called "money market deposit accounts" which are just a kind of bank account. The name doesn't mean they invest in the money market, it means that originally the idea was that they were allowed to pay higher interest in order to compete with money market mutual funds. An FDIC-insured bank account is an FDIC-insured bank account, regardless of whether the account name has the words "mone market" in it.

[White Coat Investor]

Sorry for newbie question, I have been checking the forum and saw conflicting information.

• Ultimately, is VMFXX (Vanguard Federal Money Market aka Vanguad Settlement Funds) safe?

I define safe not based whether the return can go up or down but rather the risk that what I think is in cash (Vanguard settlement) will still be there at the end of this.

FDIC means to me that if the bank goes belly up, I still get my money up to $250k. VMFXX is in short-term government rates so does that mean I am basically ok if US doesn't default on national debt? So is my risk really that US doesn't fund come to a budget agreement and defaults?

If this is a risk you're worried about, I'm curious how you sleep at night owning stocks.

[JackoC]

Questions of ultimate safety are pretty sterile, because the situations which would make these vehicles unsafe are too rare to analyze statistically, each one is unique, and each one is normally followed by changes intended to make them safer.

Money market mutual funds like VMFXX are not insured. They are intrinsically pretty safe based on a) what they invest in, b) regulation, and c) the protections of all mutual funds and ETFs under the Investment Company Act of 1940.

1. But obviously they are not as safe as an FDIC-insured bank account.

2. A sane person could decide that in a completely unprecedented deep financial crisis, money market mutual funds and bank accounts are so different that they are exposed to different risks, and I suppose some people might argue that having some money in each kind of vehicle might serve as a backstop.

1. But 'obviously', a lot of people don't agree with that, as many posts state on every thread like this. I think the risk difference is indeterminate between the two, but not 100% negligible for either.

2. Therefore the correct approach is not to decide which has slightly less risk and put 100% in that one, but to give some value to the slight diversification benefit of having both. Although, that must be weighed against after tax rate and possibly other factors. But if you think there's any risk worth considering in either one (short term MMF v bank account, medium treasury v CD) then it's obviously not 100% the same risk for both. Right now rates favor treasury MMF's v bank accounts generally for most people, but CD's* over treasuries. A few weeks ago rates favored VUSXX and treasuries over bank accounts and CD's. A year ago the favored rate combination was bank accounts and treasuries (usually), at other times in the past it's been bank accounts and CD's. Over time you'd naturally get a mix (in a CD/treas ladder especially) if you just focused on rate, and I think that's happily also beneficial in slightly diversifying a small set of risks which are clearly not identical between FDIC/bank and treasury/federal MMF

*though that's oversimplifying at least 4 ways: a) considering inflation indexed instead of nominal treasuries v CD's, b) the value of the implicit put option on a direct CD with EWP c) if the investor sees a lot of value in long term nominal treasuries though I fail to understand the attraction of that for most retail investors, and you could add duration risk with taxable CD plus long treasury futures in IRA if really necessary d) liquidity needs but that's also addressable a variety of ways, not just by having nominal treasuries.

[Hzgray]

What happens to the individual funds if a mutual fund company goes under? Is there risk there?