Trying to Understand VMFXX

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centennialstate
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Trying to Understand VMFXX

Post by centennialstate »

Hi Everybody,

I'm trying to understand a couple things about Vanguard's federal money market fund (VMFXX). I understand that when you hold "cash" in your Vanguard account, it by default sits in VMFXX. If I had a more in-depth understanding of government bonds, I'm sure I wouldn't need to ask, but I was hoping you all could just clear a few things up for me. Here's the fund description, and my questions are below.

Vanguard Federal Money Market Fund’s investment objective is to seek to provide current income while maintaining liquidity and a stable share price of $1. 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. Although the fund invests in short-term U.S. government securities, the amount of income that a shareholder may receive will be largely dependent on the current interest rate environment. Investors who have a short-term savings goal and are interested in a fund that invests in securities issued by the U.S. government or its agencies may wish to consider this option.

1. What exactly does it mean that the target is a "stable share price" of $1? I'm confused by the idea that my dollars are not dollars, but rather a description of market value as they would be in the case of stocks, funds, etc. And if my account balance is merely the market value of a bonded fund, is there a true cash option available through Vanguard?

2. Does the cash portion of my Schwab portfolio function in the same way?

3. I noticed that the fund has performed at 3.99% since 1981. How does this happen under the "$1 share price" concept? Is the investment principle somehow designed to beat inflation? I know it's not a TIPS fund or and I-Bond fund, but that sure seems like a good investment for somebody whose only objective is to beat inflation while keeping liquidity. Do you agree?
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RickBoglehead
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Re: Trying to Understand VMFXX

Post by RickBoglehead »

The pricing wording covers them if they have to go below $1. Breaking a $1.00 share price is considered sacrilege. "Breaking the buck". https://www.investopedia.com/terms/b/br ... e-buck.asp
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increment
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Re: Trying to Understand VMFXX

Post by increment »

centennialstate wrote: Thu Jul 29, 2021 6:51 pm is there a true cash option available through Vanguard?
Financial institutions have to do something with "cash" and are not going to keep huge piles of currency in a vault on your behalf. Making short-term loans to the US government (through VMFXX or VUSXX) is the safest that Vanguard will do for you.
Does the cash portion of my Schwab portfolio function in the same way?
Schwab has an affiliated bank and keeps your brokerage account's cash there.
I noticed that the fund has performed at 3.99% since 1981. How does this happen under the "$1 share price" concept?
By paying out the interest from the government bonds (because it's a mutual fund, these payments are called "dividends"). The price per share stays fixed and those payments go to buying more VMFXX shares.

Note that in these low-interest days you should expect something like 0.01% annualized from VMFXX.
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ResearchMed
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Re: Trying to Understand VMFXX

Post by ResearchMed »

RickBoglehead wrote: Thu Jul 29, 2021 6:54 pm The pricing wording covers them if they have to go below $1. Breaking a $1.00 share price is considered sacrilege. "Breaking the buck". https://www.investopedia.com/terms/b/br ... e-buck.asp
CREF's Money Market Fund notified participants that starting 30 June 2021, it might go negative.
Does this mean that they are indeed breaking the buck, or do they just deduct the number of 'shares' (where each = $1) and thus 'technically' avoid that?

How are the other main MM funds handling this possibility?

RM
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Doctor Rhythm
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Re: Trying to Understand VMFXX

Post by Doctor Rhythm »

I’ll take a stab at this:

1. Yes, you’re buying shares of a fund that is priced at $1 per share and aims to keep it that way. If you sell shares, there won’t be any capital gains tax. Returns on investments that the fund holds (eg, government securities) are paid out as income distributions (which itself is taxable). By picking very safe investments, there is little risk of loss of principal — aka, breaking the buck, but that risk does exist. I don’t think you can hold cash at Vanguard.

2. Not sure about Schwab. They actually are a bank, so it’s possible your cash there can be held as FDIC-insured cash.

3. Returns on a fund includes any changes in share price and payout of dividends. The MM fund pays dividends (essentially interest), so it has a positive return (ignoring inflation) even though the share price is static. 1981 was a long time ago, and historical interest rates are just that. Right now it pays less interest that an on-line checking account, so I wouldn’t store cash there.
Last edited by Doctor Rhythm on Thu Jul 29, 2021 8:32 pm, edited 1 time in total.
tomsense76
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Re: Trying to Understand VMFXX

Post by tomsense76 »

Under-the-hood this invests in short-term securities like T-Bills (US Bonds) amongst other things. These provide a little bit of return along with pretty good stability.

However if the underlying securities lose value, the money market fund can "break the buck" meaning it is now not $1 per share, but maybe $0.99999 per share. This very rarely happens, but it can and has happened before. In fact it happened during the GFC.

There were a number of regulations put in place after that to help shore up money market funds. These effectively created a different set of money market funds for us retail traders with greater protections and added additional warnings to the institutional ones (like those used by corporate treasurers).

Additionally the Fed now watches liquidity in these funds like a hawk and stepped in during the COVID crash. It's likely they would do this again if they needed to.
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increment
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Re: Trying to Understand VMFXX

Post by increment »

ResearchMed wrote: Thu Jul 29, 2021 8:20 pm CREF's Money Market Fund notified participants that starting 30 June 2021, it might go negative.
Does this mean that they are indeed breaking the buck, or do they just deduct the number of 'shares' (where each = $1) and thus 'technically' avoid that?
It looks like the "CREF Money Market Account" is not a "money market mutual fund" (valued at $1/share) and its value may decline. On the other hand, it appears that the "TIAA-CREF Money Market Fund" will continue to have expenses waived and will not immediately "break the buck."
tomsense76
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Re: Trying to Understand VMFXX

Post by tomsense76 »

Also would suggest reading this ( viewtopic.php?t=350931 )
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
increment
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Re: Trying to Understand VMFXX

Post by increment »

Doctor Rhythm wrote: Thu Jul 29, 2021 8:25 pm 2. Not sure about Schwab. They actually are a bank, so it’s possible your cash there can be held as FDIC-insured cash.
Note that the cash in your Schwab brokerage account is automatically kept at Schwab Bank and gets 0.01% in interest. If you open a separate Schwab Bank account and move the money there manually (which Schwab makes quite easy), you can get three or more times that (small) amount.
Doctor Rhythm
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Re: Trying to Understand VMFXX

Post by Doctor Rhythm »

increment wrote: Thu Jul 29, 2021 8:41 pm
Doctor Rhythm wrote: Thu Jul 29, 2021 8:25 pm 2. Not sure about Schwab. They actually are a bank, so it’s possible your cash there can be held as FDIC-insured cash.
Note that the cash in your Schwab brokerage account is automatically kept at Schwab Bank and gets 0.01% in interest. If you open a separate Schwab Bank account and move the money there manually (which Schwab makes quite easy), you can get three or more times that (small) amount.
Explains why Schwab-designed portfolios maintain 5% in cash.
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ResearchMed
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Re: Trying to Understand VMFXX

Post by ResearchMed »

increment wrote: Thu Jul 29, 2021 8:35 pm
ResearchMed wrote: Thu Jul 29, 2021 8:20 pm CREF's Money Market Fund notified participants that starting 30 June 2021, it might go negative.
Does this mean that they are indeed breaking the buck, or do they just deduct the number of 'shares' (where each = $1) and thus 'technically' avoid that?
It looks like the "CREF Money Market Account" is not a "money market mutual fund" (valued at $1/share) and its value may decline. On the other hand, it appears that the "TIAA-CREF Money Market Fund" will continue to have expenses waived and will not immediately "break the buck."
Thanks!

It seems that the same problem is going to show up with the TIAA-CREF MM Fund, if it hasn't already.

From the link you posted:

"... In the interest of helping our participants avoid negative returns in the CREF Money Market Account, we worked with regulators to provide a limited and short-term waiver of account expenses. This waiver was set to expire on June 30, 2021 but we will continue to waive fees on a limited basis. The waiver is now estimated to end sometime between June 30, 2021 and December 31, 2021, but could terminate at any time.
■ Once this waiver expires, CREF Money Market Account investors will experience negative returns in the Account if interest rates do not rise sufficiently to cover the Account’s expenses..."

So, for either fund, or any fund affected like this, does the "share price" drop below $1 or do they shave the number of shares? (This only "matters" technically in terms of breaking the buck or not, I suppose.)

RM
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RickBoglehead
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Re: Trying to Understand VMFXX

Post by RickBoglehead »

I don't believe they can take shares you own.
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VelvetNirvana
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Re: Trying to Understand VMFXX

Post by VelvetNirvana »

Does anyone know when the 7 day interest rate is changed?

I had been getting 2.5% in my high yield savings account and moved that savings into the municipal money market account as it offered better after tax yield. However VMFXX is paying out 3.68% currently so that is better still. Just wondering if there is a time of day I can check this so I can track it to know where I am yield wise.

Normally I wouldn't care too much but we are saving up for a car purchase and a roof replacement...so it's a 6 digit amount of cash that I don't want to take much risk with but also don't want inflation to devalue any more than necessary.

Cheers!
sycamore
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Re: Trying to Understand VMFXX

Post by sycamore »

VelvetNirvana wrote: Tue Nov 29, 2022 4:45 am Does anyone know when the 7 day interest rate is changed?
An observation:

As of 7:44 am Eastern Time, the Vanguard web page for VMFXX says:
7 day SEC yield
3.68% C 
as of 11/28/2022
So they're updating the yield no later than 7:44 after midnight. But I'm sure they don't make any promises about that. Seems to be good enough to make a decision for you?
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