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Erin Arvedlund: Money market fund yields are dropping, prompting fee waivers

Erin Arvedlund, The Philadelphia Inquirer on

Published in Home and Consumer News

Good news for investors: Some large firms such as Fidelity and Vanguard, the Malvern-based mutual fund giant, are waiving some fees on money market funds.

The bad news: That's because yields are so low on money market funds that without a fee waiver, the returns might drop below zero.

Blame the Federal Reserve for this conundrum, as yields fall below expenses of running a money market fund, said Jeffrey DeMaso, head of research at Adviser Investments and co-editor of a Vanguard newsletter.

With its most recent round of interest rate cuts, in March, the central bank threw an anchor into the market, pulling down yields.

The Federal Reserve set the target range for federal funds at 0.00% to 0.25%. Yields on money market mutual funds tend to follow short-term rates set by the Fed, although typically with a lag. That means following a Fed rate cut, yields on money market mutual funds trend lower.

And that's exactly what's happened.


For the Vanguard Pennsylvania Municipal Money Market Fund, for example, Vanguard said expenses of the fund are being "temporarily reallocated" to other funds within Vanguard. Effectively, it's a fee waiver.

Vanguard, the world's largest fund manager with some $6 trillion in assets, said in a securities filing this month that it made the change "to maintain a zero or positive yield for the fund."

"This is not a 'break the buck' scenario, like we saw during the Great Financial Crisis," DeMaso said. That was when money market funds' net asset value fell below the $1.00 per share floor.

Instead, yields have dropped.


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