Money market fund yields are dropping, prompting Vanguard and BlackRock to waive fees for investors
After the Fed cut interest rates, money market fund yields began falling. And they might even be negative — charging investors money — if companies like Vanguard hadn't waived the fees.
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Good news for investors: Some large firms, such as Fidelity and Vanguard, the Malvern-based mutual fund giant, are waiving some fees on money market funds.
The bad news: That’s because yields are so low on money market funds that without a fee waiver, the returns might drop below zero.
Blame the Federal Reserve for this conundrum, as yields fall below the expenses of running a money market fund, said Jeffrey DeMaso, head of research at Adviser Investments and co-editor of a Vanguard newsletter.
With its most recent round of interest rate cuts, in March, the central bank threw an anchor into the market, pulling down what bank accounts and money market funds pay out to customers.
The Federal Reserve set the target range for federal funds at 0.00% to 0.25%. Yields on money market mutual funds tend to follow short-term rates set by the Fed, although typically with a lag. That means following a Fed rate cut, yields on money market mutual funds trend lower.
And that’s exactly what’s happened.
For the Vanguard Pennsylvania Municipal Money Market Fund, for example, Vanguard said expenses of the fund are being “temporarily reallocated” to other funds within Vanguard. Effectively, it’s a fee waiver.
Vanguard, the world’s largest fund manager with $6 trillion in assets, said in a securities filing this month that it made the change “to maintain a zero or positive yield for the fund.”
“This is not a ‘break the buck’ scenario like we saw during the Great Financial Crisis,” DeMaso said. That was when money market funds’ net asset value fell below the $1-per-share floor, shaking the economy.
Instead, yields have dropped.
“It’s more akin to the 2011 period when money market yields were heading down because of what the Fed did, cutting rates. The Fed funds rate is near zero as well. So that’s the gravity that’s the pull on yields again today” in money market funds, DeMaso said.
As an alternative, he prefers to hold Vanguard Short Term Tax Exempt Fund, saying, “I get a little bit of income with about the same risk.”
Will bond funds be next for fee waivers?
Vanguard’s Short-Term Treasury Fund [symbol: VFISX] has also seen its yield drop sharply, said Adviser Investments’ Dan Wiener.
After fees, the yield on the Vanguard Short-Term Treasury Fund actually fell to a negative yield, minus-0.01% last week.
While the yield varies from day to day, it shows that “with the Federal Reserve at the zero-bound, all kinds of yield anomalies are bound to begin springing up. Clearly, bond investors are now operating in a new world. The search for yield continues,” he said.
And it’s not just Vanguard waiving fees. Roughly half of Wall Street firms are cutting fees temporarily, according to trade publication Ignites.com.
Fidelity in March began waiving fees on Fidelity Treasury Money Market Fund, Fidelity Government Money Market Fund, and the FIMM Treasury Portfolio, due to falling interest rates.
Alternative? Keep your money in the stock market — which was the Fed’s goal all along. Another option: an exchange-traded fund, ICSH, run by BlackRock. The ETF yields 0.60% with a fee of 0.08%.