Amid stock and bond market turmoil, wars in the Middle East and Ukraine, and elevated inflation, investors have been flocking to money market funds, which have been yielding 5%.
So far this year, retail investors have put $960.2 billion into money funds, compared to $225.7 billion into equity exchange-traded funds (ETFs) and $164.6 billion into fixed income ETFs, CNBC reports, citing Strategas data.
While investors welcome the returns and the convenience of being able to invest in a money market fund at a bank or a credit union, experts say risk-averse investors may want to consider alternatives, such as a certificate of deposit at a bank or a Treasury bond.
Among the largest taxable retail money market funds, one of the highest-paying is the Federated Hermes Prime Cash Obligation fund (PCOXX), paying 5.42%. There’s also the Fidelity Investments Money Market fund (FNSXX), yielding 5.37%, and the Schwab Value Advantage Mutual Fund Ultra fund (SNAXX), delivering a return of 5.39%.
However attractive these yields may be, they are not guaranteed.
“The yields are really ephemeral,” says Christine Benz, director of personal finance and retirement planning at Morningstar. “You are not locking anything in. It [the return] is going to ebb and flow with anything going on in the interest rate environment.”
Another important consideration when weighing a money market fund versus a CD is that money funds are not insured by the Federal Deposit Insurance Corporation.
However, money funds can be redeemed at any time and are highly liquid, whereas a CD must be locked in for a minimum of six months without paying a penalty before its maturity.
“If you have a longer time horizon and a specific goal, then by all means think about adding some investment where you would be locking in your higher interest rate over a longer time frame,” Benz suggests. “CDs can be really attractive in that context.”
As for Treasury bonds, interest rates are eventually going to come down, and with them, bond yields, says Barry Glassman, president of Glassman Wealth Services.
“Why would someone invest in a five-year Treasury note when a money market fund is yielding higher?” Glassman asks rhetorically. “The reason is the forecast that rates are going to come down, and people will be grateful with the yield that is currently lower but is locked in for a longer period of time.”
Of course, there’s always the option to invest in stocks, Benz adds. They make sense for long-term investors and are the asset class that has historically outpaced inflation.
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