Consider moving Vanguard brokerage cash from VMFXX to VMMXX

[Free-quent Flyer]

Vanguard recently sent me a notice saying:

"As a result of the SEC's money market reform regulations, we've made Vanguard Federal Money Market Fund the only settlement fund for all brokerage clients. This fund will have a $0 balance until you add money to it or sales proceeds sweep into it. Please be sure you have money in the fund before placing any buy orders.

Your former settlement fund is now a holding in your account and includes any money you had invested in the fund. You'll receive a trade confirmation that reflects the change from a settlement fund to a holding. For more details, visit your Transaction history page on vanguard.com.

With this change, it's a good time to review all of your account conveniences to make sure your account is set up with the services you want. To make updates, go to the Account maintenance page and select the appropriate service."
​

This is a minor change, but the Vanguard Prime Money Market Fund previously used as my settlement fund is actually slightly superior to the new Vanguard Federal Money Market Fund.

Vanguard Federal Money Market Fund (VMFXX): Expense ratio: 0.11%, SEC yield: 0.30%
Vanguard Prime Money Market Fund (VMMXX): Expense ratio: 0.16%, SEC yield: 0.55%

So if you are making automatic contributions to your Vanguard brokerage account's settlement fund, for example while you wait to have the minimum investment for a particular fund you're interested in, you should consider redirecting those automatic contributions to VMMXX instead.

 

[ENOTTY]

Whoa now, let's not be too hasty about these two funds without considering the difference between the two. Just because one has a higher yield does not mean it has a better risk-adjusted yield.

VMFXX invests in only short-term US government bonds and obligations. It is the safest possible thing one can invest it.

On the other hand, VMMXX includes a 57.5% allocation to Yankee bonds, which are foreign bonds denominated in US dollars, and 12.1% allocation to CDs. True, these bonds are rated by the credit rating agencies near the top of the scale. And true, the term is very short. But there are still additional risks (e.g., sovereign risk) that are not present in VMFXX. Arguably CDs are very safe because they are backed by the FDIC, however liquidity might be a problem in the event of a whole slew of concurrent bank collapses. (Remember that one of the big advantages of cash is its liquidity.)

What you think is an appropriate place to stash your cash is up to you and your risk profile

 

[Free-quent Flyer]

@ENOTTY thanks for providing a more thorough assessment of the possible risks of making the move I suggested. Clearly, the risk-adjusted yield is far more important than the difference in SEC yields I cited, and investors should carefully weigh the potential for losses that come with their choice of money market fund.