Money Market Funds: The Next Bubble Or The Logical Alternative To Savings Accounts?

Tired of getting no interest on your savings? Take a look at some of the alternatives.

Summary

• Money Market Funds might be a good alternative to savings accounts and their minuscule interest rates.

• I prefer Money Market Funds with a portfolio of Treasuries instead of funds that hold Federal Reserve Repurchase Agreements, despite the lower interest rate.

• Money Market Funds are not FDIC insured like Money Market Accounts or Savings Accounts, but they are a low-risk way to get some return on your cash.

• I list some of the other alternatives for investors looking for cash alternatives.

---

Money Markets

I plan to dive into other big picture topics and individual companies in coming weeks, but I wanted to write my first post on money market funds. It’s not a frequently discussed topic in most investing circles, but I think it is a relatively low risk way for investors to get a better interest rate on their short to mid-term cash holdings. While money market interest rates won’t keep up with inflation (another topic I will address in a future post), I think it is a logical alternative to bank savings accounts, where interest rates remain close to zero.

I have seen a couple videos and podcasts on money markets and the continued inflows money market funds have seen due to the difference in interest rates between savings accounts and money markets. Money market funds recently reached an all-time high in assets under management, passing $5T in AUM in March. While I think this is a logical reaction to the minuscule interest rates of savings accounts and the issues with the banking system after Silicon Valley Bank’s blowup, some investors are worried about potential for issues created by these continued money market fund flows.

Jason Burack of Wall Street for Main Street has talked about money markets in some of his videos, where he (rightly) points to the money market bailouts in 2019 and the potential for issues created by the Federal Reserve repurchase agreements inside many money market funds. Investors who have been around since 2008 might remember when money market funds broke the buck. Most of those consequent outflows went into safer government and treasury money markets instead of finding a home in other assets. I would be surprised to see something like this happen again, but I think there are good options in money market funds for people who are tired of the near-zero interest rates offered by savings accounts.