Money-market mutual funds are learning to limbo, and the contest is on to see which will be the first to yield absolutely zilch. One fund was almost there in mid-December: The C class shares of Invesco Cash Reserves, sold only through advisers, generated a seven-day compounded yield of 0.01 percent.
Money-market funds have been around for 31 years. Ironically, these record-low yields coincide with an all-time high in money-fund assets. According to iMoneyNet, some $435 billion has been poured into money-market funds this year, pushing assets to $2.3 trillion.
Behind those amazing disappearing yields is the Federal Reserve Board, which has been zealously cutting short-term interest rates to revive the economy. The Fed's most recent move, on Dec. 11, took the federal funds rate, the interest paid by banks on overnight loans, to a 40-year low of 1.75 percent. Yields on Treasury bills, commercial IOUs and other short-term debt that money funds buy have followed the funds rate down.
With yields in the gutter, expenses can claim nearly all of a money fund's earnings. As yields approach the vanishing point, the question arises: Will share prices in funds marketed to individual investors fall below $1 for the first time?
Probably not. But if rates fall further, some funds with sky-high expenses will be forced to cut their fees to avoid breaking the buck.
To avoid negative returns, companies have begun trimming expenses. After Cash Reserves C's yield nearly hit zero, Invesco lowered the fund's expense ratio from 1.64 percent to 1.16 percent. Monarch Treasury Cash, another fund dangerously close to yielding zero, cut its yearly fees by 0.27 percentage point in early December.
But not every firm is rushing to make its money funds competitive. Some companies see the vehicles as a convenience for fund-hoppers, not as investments in their own right.
"We don't hold out our money-market fund as a safe, long-term investment," ProFunds CEO Michael Sapir says.
"We're a way station between one or another of our funds."
Investors looking for a return on their money-market assets should seek out the funds with the lowest expenses. Vanguard Federal Money Market fund, with an expense ratio of 0.33 percent, recently reported a seven-day yield of 2.4 percent.
If you're willing to take on a tad more risk, consider an ultrashort bond fund. Strong Advantage, at 1-800-368-3863, recently delivered a 30-day yield of 5.1 percent.