The Market Of Corporate Debt
The top money market funds are dominated by the trade of a form of saleable corporate debt that has very short maturity dates. The topic is a bit dense so we advise the reader to see a separate article on our site for an explanation of what is the money market and what are money market funds.
But suffice it to say that investors can purchase shares of money market funds much like mutual funds, and reap the gains over the time, until they wish to close their positions by selling the securities.
Nuances Of The Money Market
But not all top money market funds are identical in as much the same way as mutual funds have different compositions of stocks and bonds. This is because each fund picks out its own basket of debts for investment. The way they are picked out could be algorithmic or attributable to the information and knowledge of the fund managers. While the way the components are picked out is different, the quality of debt is always very high. Furthermore, as a testament to the high quality, there have been only two, perhaps three, times when the commercial paper market seized up.
The 2007 Financial Crisis
One of those times was in the financial crisis of 2007 precipitated by the crash of mortgage backed securities and the subsequent implosion of Lehman Brothers.
Three Top Funds
Three of the top money market funds are described as follows. Take a look at our article on how to compare mutual funds before thinking about buying mutual funds. We also have an article on mutual fund advice that will help the fresh investor. All three companies are known for their index and large cap mutual funds.
Fidelity
Fidelity Investments' Cash Reserves (Nasdaq:FDRXX) has assets near $110 billion as of Sep 2010, a value that had been exceeded at times in the past. The fund has no load, but the expense ratio is 0.28%, meaning that for a $10,000 investment, there is a charge of $28 in fees for maintenance of the account. This is a fairly low expense ratio until you consider that the yield to date is at 0.04%. By any interpretation investors are losing money simply by attrition from the expense ratio. The 10 year historical annualized yield, which includes the time before the 2007-2010 crisis, stands at 2.62%. The 5 year annualized rate is not far behind this. This is more comfortably over the expenses.
Vanguard
The Vanguard Prime Money Market sits on top of $137 billion of investor money, the largest by value of the three top money market funds we are considering here. The expense ratio is a bit higher at 0.41%, than Fidelity. Yet the yields have not been impressive in the end of the first decade of the 21st century. The year-to-date yield is similar at 0.04%. Translated to hard numbers, it means that an investment of $10,000 placed into the Vanguard fund would have yielded a paltry $4 over 10 months. The 10 year rate reflects better times and is comparable to Vanguard, hovering near 2.6%.
Schwab
The Schwab group also maintains one of the top money market funds (Nasdaq:SWVXX). The market value is only about $25 billion, which is about a sixth the size of the two other behemoths. The expense ratio is comparable to Vanguard but a bit higher than Fidelity. Interestingly enough, the minimum investment is about 8 times higher than the competing brokerages. The 10 year rate is at 2.5%.