Markets & Economy
How safe are Vanguard money market funds?
May 08, 2013
Amy Chain: Arnold from New York asks, "How safe are Vanguard's money market funds? Is there government insurance and, if so, in what amount?"
Sarah Hammer: Right. Another great question on the minds of a lot of our clients. With all the news that we often see about money market funds, sometimes there's confusion. As we talked about, Amy, there is not FDIC insurance with our money market funds as there would be with a savings account. Last year, in August, David Glocke, and John Ameriks, and I, and some others at Vanguard wrote a commentary that's available on our website to discuss some of our practices in our money market funds, to address some of these questions. We really highlighted five principles that we utilize to manage our funds.
The first is, as you're always going to hear from us at Vanguard, low expense ratios. Our clients are probably familiar with our at-cost structure, which we combine with economies of scale to push down the expense ratios in our funds historically and over time.
Average expense ratios
Expense ratios as of December 31, 2012. Vanguard expense ratios range from 0.02–1.71%. Average expense ratios are represented as a percentage of net assets.
*Sources: Vanguard; 1975-77 Weisenberger Panorama; and Lipper Inc. thereafter.
Amy Chain: Can we talk a little bit about why that's important in a money market fund in particular?
Sarah Hammer: Sure. Well, do you want to take that one, David?
David Glocke: Sure. The importance of that is to keep the expense as low as possible so our investors get as much from the investment as they possibly can. So keeping those costs low, not having to pay shareholders and the rest for equity in the company, allows us to go ahead and provide a higher return. It also gives us another added benefit, which we take advantage of here quite a bit. We keep the portfolio at a very-high-credit-quality level and maintain a high degree of liquidity in the fund, and those assets don't always pay as much as others in the marketplace. We find that our funds can actually be highly competitive in the marketplace because of that low-cost advantage that we have. That lower expense ratio is a key advantage.
Amy Chain: That's great. Thank you. I distracted you. That was on the line. Thank you.
Sarah Hammer: David actually mentioned some of the other principles that we talk about in the commentary, which is our high standards for managing the credit in the portfolio, high standards for managing liquidity, and then David and his team work very closely with our credit analysis team, which is a very experienced team of professionals with a lot of years of experience in finance, who perform the fundamental analysis for every security that gets purchased by the portfolio.
David Glocke: The credit team is really our front line defense. They're out there making the decisions about what credits are eligible to go into the fund—those that meet Vanguard's standards for purchase in the money market funds. They'll make an independent credit decision, and then those names are added to our approved list, and that's the list that the traders and I use to decide which securities we may want to invest in or not invest in.
Then on top of that, they monitor those credits on an ongoing basis for changes in the market, changes in conditions that might influence whether or not we want to continue to invest in those securities. So they're really, like I said, the front line, and there's a total of 23 senior credit analysts on our team with a full staff that supports those people.
Sarah Hammer: That's an important nuance because I think the general public knows a lot about the rating agencies, but it's important to know that we have own internal rating agency, so to speak, that looks at every investment that our teams make pretty closely before it's even on the table for investment.
David Glocke: True. The regulators actually require that Vanguard does its own independent analysis. We don't rely on Moody's, and S&P, and others to make the decisions for us. We actually do our own internal ratings, and our credit analysts make a decision about what credit quality they would apply to a particular security. We use that in the investment process.
Amy Chain: That's great. Did we get through all the principals? I lost track of our count.
Sarah Hammer: I think the one thing we didn't mention, Amy, is we discussed in the commentary something we do call "guarding against disruptive redemptions" in the portfolios. That's kind of a fancy way of saying that we try to protect against in situations where a large, concentrated investor will quickly or suddenly withdraw money from the portfolio because, when that happens, it can be very costly to the remaining investors in the portfolio. There's a name for that in the industry, which is "hot money."
The way we try to guard against that is we ask several questions of a potential client that might have a multimillion dollar or more investment in the funds. We try to ascertain: What's the nature of your investment? Are you investing for the long run or are you just waiting for the next best thing? Are you looking for just an extra basis point or two, and then will you be moving on to another portfolio? Based on that, we have been known to turn away "hot money."
All investments, including a portfolio's current and future holdings, are subject to risk.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
For more information about Vanguard funds, visit Funds, Stocks & ETFs or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
Vanguard experts talk about high quality and low costs
Headlines about money market funds "breaking the buck" a few years ago prompted significant regulatory changes. David Glocke, a portfolio manager with Vanguard's Fixed income Group, and Sarah Hammer, a senior analyst with Vanguard Investment Counseling & Research, detail the high standards we use to ensure credit quality and portfolio safety for our money market investors.
Other excerpt from this webcast:
- All investments, including a portfolio's current and future holdings, are subject to risk.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- For more information about Vanguard funds, visit Funds, Stocks & ETFs or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.