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With yields at around 5%, money market funds have been attracting investors in droves — yet not all funds are the same. Government funds account for about 80% of the market, while about 20% are prime funds, according to Crane Data, a firm that tracks money markets. Prime funds hold primarily corporate debt securities. Since corporate debt is considered riskier than taxable government debt, investors are rewarded with a higher yield. Right now, prime funds yield an average 5.18%, while the average government fund’s yield is 4.98%, per iMoneyNet. Yet, prime funds aren’t necessarily risky, said Dave Lafferty, director of fixed income product strategy and development at Schwab Asset Management. “While it is credit exposure, it is extremely high-quality credit exposure, very diversified across many, many issuers and for that, you are picking up about 20 basis points across the industry right now,” he said. Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes, agreed, pointing out that many funds are triple-A rated. “It’s not a huge gradation of risk when you go from a triple-A rated government fund to a triple-A rated prime fund,” she said. Similar to government funds, they hold extremely short-term debt. The weighted average maturity of retail prime money market funds is around 32 days, said Shelly Antoniewicz, deputy chief economist at the Investment Company Institute. Retail investor interest heats up Retail investors started turning their attention to money market funds when the Federal Reserve began raising interest rates last year. Total net assets for money market funds increased $64.13 billion to hit $5.71 trillion for the week ending Oct. 4, according to ICI . Government funds added $52.59 billion, while prime funds increased $7.02 billion. During the zero-rate environment, money market fund investors stuck largely with government funds over prime funds since there wasn’t a big spread between the two, Federated Hermes’ Cunningham said. Interest in prime funds ticked up late last year and during the regional bank crisis this year, she said. Money appeared to be largely moving from bank savings accounts as investors discovered the higher yields and the spreads widened between government and prime funds, she explained. Yet, institutional investors are still on the sidelines. Last week, prime retail fund assets surpassed institutional assets for the first time since the end of 2016, said Crane Data founder Peter Crane. He suggests sticking with those from the largest firms where you may already have accounts. Convenience is more important than any incremental yield you may gain from going elsewhere, he said. Cunningham also advises looking at a fund’s net assets when deciding where to invest. “If you’re looking at small funds, they generally don’t have the same capabilities for structuring products that make the most amount of sense for their own return, as some of the larger funds in the market do,” she said. The move to $7 trillion Cunningham thinks institutional investors will return to prime money market funds once there is a plateau in interest rates — and even more so when interest rates start to go down. The Federal Reserve indicated in September it will hike once more before the end of the year and have two cuts in 2024. Cunningham predicts the growth in institutional inflows will help propel total net assets in mutual funds to $7 trillion by sometime next year. Yields will also continue to be attractive, she said. “They will enjoy higher yields for quite some period of time and even more importantly, I don’t think that the return to normal takes you back to zero,” she said. “If the Fed gets inflation to 2%, that still probably means 3.5%, 4%, 4.5% type of money market rates.” Correction: A table in an earlier version of this report incorrectly described the listed funds as government money market funds. They are prime money market funds.
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