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Money market fund yields plummet, prompting Vanguard and BlackRock to waive fees for investors

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

The bad news: This is because yields are so low on money market funds that without a fee waiver, yields could fall below zero.

Blame the Federal Reserve for this conundrum because the returns are lower than the expenses of running a money market fund, said Jeffrey DeMaso, head of research at Adviser Investments and co-editor of a newsletter. Vanguard.

With its latest round of interest rate cuts in March, the central bank has dropped an anchor in the marketreducing what bank accounts and money market funds pay out to customers.

The Federal Reserve has set the federal funds target range between 0.00% and 0.25%. Money market mutual fund yields tend to track short-term rates set by the Fed, although usually with a lag. This means that following a Fed rate cut, money market mutual fund yields tend to fall.

And that’s exactly what happened.

For the Vanguard Pennsylvania Municipal Money Market Fund, for example, Vanguard said fund expenses were “temporarily reallocated” to other funds within Vanguard. Effectively, it is a fee waiver.

Avant-garde, the world’s largest fund manager with $6 trillion in assetssaid in a securities filing this month that he made the change “to maintain a zero or positive return for the fund.”

This is not a “vault buster” scenario like we saw during the Great Financial Crisis,” DeMaso said. It was then that the net asset value of money market funds fell below the floor of $1 per share, shaking the economy.

Instead, yields plummeted.

“It’s more like the period in 2011 when money market yields were down because of what the Fed did, cutting rates. The federal funds rate is also close to zero. So it’s gravity that’s putting further pressure on yields today” in money market funds, DeMaso said.

Instead, he prefers to hold the Vanguard Short Term Tax Exempt Fund, saying, “I get some income with about the same risk.”

Will bond funds be the next to benefit from fee waivers?

Vanguard Short Term Cash Fund [symbol: VFISX] also saw its yield drop sharply, said Dan Wiener of Adviser Investments.

After fees, the Vanguard Short-Term Treasury Fund’s return actually fell to a negative return, minus -0.01% last week.

Although the yield varies from day to day, it shows that “with the Federal Reserve at the zero boundary, all sorts of yield anomalies are bound to start to appear. Clearly, bond investors now operate in a new world. The search for yield continues,” he said.

And it’s not just Vanguard that’s waiving the fee. About half of Wall Street firms are temporarily cutting fees, according to trade publication Ignites.com.

In March, Fidelity began waiving fees on Fidelity Treasury Money Market Fund, Fidelity Government Money Market Fund and FIMM Treasury Portfolio, due to falling interest rates.

Alternative? Keep your money in the stock market, which was the Fed’s goal all along. Another option: a listed index fund, ICSH, managed by BlackRock. The ETF yields 0.60% with a fee of 0.08%.

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