Money Market Funds Yielding 5.19% Broke Records in 2023. That Could Change Next Year.

Looking to make the most of your cash? Might want to skip that savings account. In October, the average US savings account was 0.46%, significantly below the 5.5% Fed Funds rate. As a result, savers have looked elsewhere to take advantage of higher rates.

Many turned to a time-tested investment, money market funds (MMFs), a popular alternative to CDs and bank accounts that invest in various low-risk, interest-paying assets like treasury, corporate and government bonds.

• In Oct. 2023, the 100 largest money market mutual funds averaged a yield of 5.19% (Crane Data).
• Since the start of 2020, the number of assets in MMFs has doubled to a record $5.6T.

Like mutual funds, MMFs can charge expense fees between 0.15% and 1.22% — eating into potential returns. While these investments are generally considered among the safest, they aren’t FDIC-insured.

MMFs vs. the S&P 500… Here’s the winner

With interest rates near zero before the Fed’s aggressive rate hikes, returns from equities had far surpassed MMFs’. But with interest rates at 22-year highs, MMFs became attractive for investors again — seen as a “no-brainer” compared to what banks are paying, per Allspring Global’s Senior Fund Manager (BBG). Compared to the S&P 500, it’s not so clear anymore:

• According to WSJ, Vanguard’s MMF had returned a total of 402% between 1981 and Sept. 2023 — while the S&P 500 had returned 3,500%.
• Wylie Tollette’s Chief Investment Officer told WSJ that “Money market funds are a rational place to be for the next six months. But over the long term, taking risks pays you more.”

Forward-looking: This year, MMFs have underperformed the S&P 500 — which is up 9% despite the recent pullback. Harris Financial Group told Bloomberg that “People have become so complacent in cash they’re missing out on” potential market returns. And whether MMFs remain a strong alternative in 2024 depends on where interest rates are headed.