As yields on money market mutual funds march toward their highest rates in more than a decade, some investors are pouring into the asset class. One fixture of overall money market funds is seeing the highest growth in decades this year – retail money market fund inflows hit $122.1 billion in the week ending Oct. 19, the most since 1992, according to data from Refinitiv Lipper. Overall, the market is seeing outflows driven by institutional investors, with $189.5 billion being withdrawn from U.S. money market funds through Oct. 19. That’s the largest net outflow for any full year since 2010, according to Refinitiv Lipper. The retail funds, however, are attractive because they’ve seen a huge increase in yields as the Federal Reserve raises interest rates to cool off high inflation. At the start of the year, such accounts were yielding 0.02% on average, according to Crane Data, a firm that tracks money markets. Now, the average yield is 2.8% and moving higher, notching levels that haven’t been seen since 2007, ahead of the Great Financial Crisis. “No doubt they will be 3% within two weeks, on average,” said Peter Crane, founder of the firm, adding that they could be pushing 4% on average by the end of the year, with little market risk. “Anyone buying 2-year Treasurys at 4% a month ago is probably going to be sorry,” he said. Why retail investors are buying money market mutual funds A volatile market that’s led to negative returns year to date for both stocks and bonds has sent many investors looking for safety. The S & P 500 is still in a bear market, down nearly 19% in 2022 At the same time, bond performance, which generally offsets market volatility, hasn’t been much better. In recent weeks yields have climbed enough to be attractive. Right now, the yield on the 2-year U.S. Treasury has topped 4.4%, up from less than 1% at the start of the year. Bond yields move inversely to prices. Those performances make assets with any gains look much more attractive. Money market mutual funds offer investors safety, making them a solid place to park cash. “Over the past couple of months, we’ve started to see certainly institutions but also retail investors parking money in money markets to avoid the volatility in the equity and bond market,” said Mark Hackett, chief of investment research at Nationwide’s investment management group, adding that he usually views such data as a barometer for fear in equities and bonds. “That was absolutely justified for much of this year.” Now, however, as short-term bond fund yields rise, it makes sense for many investors to go into short-duration bonds, he added. In addition, though market losses can be hard for investors to stomach, many stocks are now trading at a huge discount, which means it could be a good time to buy more risk assets. When they make sense for investors Most financial advisors only recommend holding cash in money market mutual funds for certain kinds of retail investors – those with very low risk tolerances, or who need to keep money on hand for a short-term use. “If you’re incredibly risk sensitive, meaning you can’t lose money either emotionally or financially, money markets make a lot of sense,” said Hackett. This can make sense for people on fixed incomes, such as retirees, he said. Liquidity is a benefit of the funds as well. Having some money in a money market fund also makes sense if you’re anticipating a large purchase, such as a house, car or paying for a child’s college education in the near term. “It’s not an investment, it’s just a holding pattern,” said Steve Azoury, founder of Azoury Financial. It’s also a good place to store your emergency fund. Financial advisors typically recommend having three to six months of expenses in cash on hand. “It’s going to pay a higher rate than a checking or savings account,” said Azoury. He added that investors should also note that not all money market mutual funds are insured by the FDIC, unlike checking and savings accounts or money market deposit accounts. Consider fees Of course, though yields on money market mutual funds are on the upswing, they still aren’t keeping pace with inflation, which is up 8.2% from a year ago, according to the September consumer price index report . Still, Crane points out that inflation is eating into returns on all investments as it erodes purchasing power. A more troubling hit to the higher returns seen on money market funds is fees, which are increasing as yields climb. In low-yield environments, such as the years following the Great Financial Crisis and the immediate aftermath of the coronavirus pandemic, asset managers waived fees on money market funds so that investors wouldn’t have negative yields, even if profits and revenues were lower for the managers. From 2006 through 2021, advisors have waived nearly $58 billion in money market fund expenses, according to a March report from the Investment Company Institute . But as yields on such funds tick up, fees are coming back and can range from 0.1% to more than 1%. Those fees add up to billions of dollars for money managers from investors. In the quarter ending Sept. 30, Charles Schwab reported $132 million in revenue from money market funds. A year earlier, they waived $83 million in fees, reporting only $29 million in revenue from the funds.
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