"All Money-Market Funds Have the Same Yield, Right? Not Even Close" - Derek Horstmeyer
- Vinicius Yamamoto dos Santos
- Aug 6, 2024
- 2 min read
In this article, Derek Horstmeyer highlights the different yields that money market funds can have and challenges the traditional view that all money market securities share the same return on investment. Horstmeyer first defines money market funds as investments in high-quality and short-term debt instruments such as three-month Treasury bills. This type of investment is highly liquid and considered extremely low-risk with low default risk and low interest-rate risk. Furthermore, one of the most important aspects stressed by Horstmeyer is how the returns for money market funds usually follow the central bank’s short-term benchmark rate. In 2022, the Federal Reserve began to raise the benchmark interest rate for money market mutual funds, and with the growth in yields for this type of investment, the gap between the top and bottom returning funds also increased.
To further examine this growing gap, Derek Horstmeyer and other research assistants studied data from all dollar-denominated money-market funds listed in the U.S. They looked at the annualized returns for these funds over a six-month, yearly, and ten year period, and then analyzed the distribution of returns for each time frame. This includes the minimum, the 10th percentile, the 25th percentile, the median, the 75th percentile, the 90th percentile, and the maximum. After the study, Horstmeyer and the other researchers concluded that the average money market fund returned 4.2% in 2023 and only 0.49% over the ten years before 2022. While this percent difference between the years can be explained with the low interest-rate environment before 2022, the more important findings come when the researchers outlined the distribution of returns within these two periods. In the decade before 2022, the money market fund at the 10th percentile of performance averaged an annualized return of 0.11% while the money-market fund at the 90th percentile averaged 1.09%. This means that the spread between the upper and lower end of distribution was 0.98% on average. Conversely, in 2023 the money market fund at the 10th percentile of performance averaged an annualized return of 0.14% while the fund at the 90th percentile averaged 5.16%, meaning there was a spread of 5.02% on average. Ultimately, the recent increase in percent spread over the years suggest that today it is even more important to consider the yields different money market funds have and to choose the best one which will maximize the return on investment.
Horstmeyer explains that the reinstallment of annual fees into money market funds could be a major cause of the increased spread of returns. With the fed-funds rate above 5%, money market funds can charge these annual fees and some are even charging expense ratios in excess of 1%. Horstmeyer acknowledges that expenses alone aren't the cause of the yield spread between the top and bottom funds, while they are considered a significant factor that buyers should be aware of in the near future.
Sources
Horstmeyer, Derek. “All Money-Market Funds Have the Same Yield, Right? Not Even Close.” The Wall Street Journal, Dow Jones & Company, 2 Feb. 2024, www.wsj.com/finance/investing/money-market-funds-yield-648d2361. Accessed 03 July 2024.
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