WSJ Explains Money Funds and CDs
The Wall Street Journal explains, "What Investors Should Know About Money-Market Funds and CDs," which tells us, "Investors are rushing into cash, fearful of a recession later in the year. In addition to having emergency cash on hand, individual investors are pouring billions of dollars into cash-equivalent investments such as money-market funds and certificates of deposit that are yielding 5% or more—far more than a traditional low-yielding bank savings account. Some analysts say concerns about stability in the banking sector after the collapse of Silicon Valley Bank and Signature Bank, and most recently First Republic Bank, could help propel the trend in the weeks to come." On Money-Market Funds, they write, "About $488 billion has poured into money-market mutual funds this year through April 27, according to Crane Data. These funds now hold a record $5.687 trillion in assets, up from $4.941 trillion a year ago. 'Investors have been lured by the attractive rates they offer,' says Peter Crane, president of Crane Data. The Crane 100 Index of the largest taxable money-market funds has an average yield of 4.65%, up from 0.02% on Jan, 1, 2022. 'Money-market funds haven't looked this good in their 50-year history except in 1979 when they were yielding double digits,' he says. 'Recent inflows are among the strongest they have ever been.' These funds -- which are different than money-market savings accounts offered by banks -- invest in short-term debt instruments such as U.S. Treasury bills and are considered 'cash equivalents,' offering investors liquidity with extremely low levels of risk. They work like a typical mutual fund and issue redeemable units or shares to investors. But a key difference is that these funds aim to maintain a net asset value of $1 a share, and earnings generated through interest on portfolio holdings are distributed to investors in the form of dividends. Money-market funds come in several varieties. Treasury money-market funds invest in short-term U.S. Treasury-issued securities such as Treasury bills. Other types may invest in federal agency notes, repurchase agreements, certificates of deposit or commercial paper." The Journal adds, "According to Mr. Crane, 'These funds have become increasingly popular with mom-and-pop investors, and there has been a surge in inflows into these funds since the blowup with Silicon Valley Bank in mid-March.' He says the retail funds that have seen the biggest net inflows year-to-date through April 27 are the $240.7 billion Vanguard Federal Money Market Fund (VMFXX), with inflows of $25.1 billion, and the $117.2 billion Schwab Value Advantage Money Fund-Investor Shares (SWVXX), with inflows of $24.2 billion. When assessing these funds, advisers suggest looking at the seven-day SEC yield, which is annualized and net of fees and is the standard measure of performance for money funds."
