Stop Using Vanguard Money Market Fund


The SEC released news rules on money market funds last week. Money market funds for retail investors will still keep the $1 fixed NAV. They can impose fees and restrictions when they face liquidity problems.

I don’t think Vanguard’s money market funds will face those problems. I still say stop using Vanguard money market funds, at least in accounts with only Vanguard mutual funds. I haven’t used one myself for a long time.

I say this not because of the new SEC rules, but because it’s really unnecessary to use a Vanguard money market fund for buying and selling Vanguard mutual funds. Vanguard brokerage accounts (for ETFs, for example) are a different story. You still need a money market fund there.

When you want to buy a Vanguard mutual fund online, you just click on buy. You get that same day‘s closing price if you place your order before 4:00 pm Eastern Time. Vanguard will debit your linked bank account afterwards. How long it takes for them to get the money is Vanguard’s problem. It’s not necessary to move money into a money market fund first.

Same for selling. If you are selling one fund to buy another, you do an exchange. Money then goes between the two funds. It doesn’t have to pass through an intermediary money market fund. If you are selling for cash in a taxable account, Vanguard will send the proceeds directly to your linked bank account. You don’t have to put the money in a money market fund first and then transfer yourself.

Apparently many people are still parking a lot of money in a money market fund when the money market fund only pays 0.01%. Vanguard Prime Money Market Fund alone has $129 billion in it as of June 30, 2014. That’s more money than the popular Wellington and Wellesley funds combined. Parking the money in a linked bank account will get both federal deposit insurance and a higher yield (for example 0.65% in Alliant Credit Union checking account). Collectively these Vanguard investors gave up hundreds of million dollars by keeping $129 billion in just this one money market fund.

Vanguard is somewhat unique in letting you buy without money on hand. Other brokerage firms such as Fidelity and Schwab don’t let you do that unless you have a margin account. Maybe many people don’t know it and thought that Vanguard works the same way.

[Photo credit: Flickr user Thomas Hawk]

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  1. Ryan says

    I completely agree with your reasoning. However, I still have a use for my Vanguard money market fund. It is the only fund in the joint account I hold with my wife. When we make our annual IRA contributions, for some reason Vanguard won’t let me transfer money from our checking account to her IRA, as I can do for my own IRA. I can, however, transfer funds from our checking account to our money market fund and then to her IRA. I was once told that Vanguard will not close out an account if there is $1,000 in it so that’s all I keep in the account the rest of the year. If there is a way to fix the transfer issue it’s not worth my time and effort to figure it out.

  2. Jane @ Degree Source says

    Thank you for this information, I always like to keep up to date with what others opinions are regarding different methods of funding accounts and similar. I’m not decided one way or the other as of yet.

  3. Khan says

    MM fund is great when you are doing a back door ROTH conversion. No increase in basis till you convert to ROTH and then you can choose whatever funds you want in ROTH.

    • Harry Sit says

      Even then you don’t need it. Just buy the fund(s) you want in the traditional IRA. When you convert to Roth, move the shares. If the fund prices are up at that time, you pay taxes on gains you wouldn’t have had if you bought into a money market fund. It’s better to have gains and pay taxes than not having gains.

  4. Karl says

    Have to disagree. I have a SEP-IRA with Vanguard and I make scheduled contributions from my business. I like having the option to park the contribution (in the MM fund) before investing it in an index or managed fund. Although I am a long-term buy and holder, there are times where the market it just rediculous with volatility or inflated asset prices. At the risk of sounding like a market-timer, I would rather park the money in the MM fund and decide later how to allocate the contribution or apply as part of a rebalancing strategy.

    • Harry Sit says

      You may be right at times — prices will fall after you contribute. You may be wrong at other times — prices will go up and you end up buying at a higher price later on. On balance you are better off using a balanced fund, such as a Target Retirement fund or a LifeStrategy fund, as the default to park your contributions. You can rebalance at a later time as needed.

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