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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