As the wrangling over the debt ceiling heats up, some investors are wondering about the safety of money held in money market funds. With unmatched size, scale, and experience, Fidelity has been a leader in managing money market funds for over 40 years. Here we explain the careful way we manage our money market funds at Fidelity so you can have confidence your money is being invested with safety and liquidity in mind.
How Fidelity manages money market mutual funds
Since Fidelity's founding, our customers' financial wellbeing has been our primary focus—in challenging markets as well as favorable ones—and the way we manage our money market mutual funds is an example of how we put that focus to work.
”Safety and liquidity have always been, and will continue to be, our top-priority objectives in managing money market funds for our shareholders, no matter the market conditions,” says Kevin Gaffney, chief investment officer for our money market funds. ”Our experienced and dedicated team of portfolio managers have managed through previous debt-ceiling debates and periods of significant market volatility. We are actively monitoring the ongoing debt-ceiling discussions and positioning our money market funds accordingly,” he says.
This is important because all money market funds are required by federal regulations to be very short in maturity and high in credit quality. What distinguishes Fidelity is the scale of our operations and the tremendous credit research, counter-party risk management, and liquidity management that we employ for our money market funds. Therefore, customers should have confidence in investing in Fidelity's money market funds.
”Our money market funds are positioned conservatively amid additional debt-ceiling risks,” says Gaffney. ”Our funds invest in money market securities of high quality and maintain high levels of liquidity.”
How can money market funds help keep my cash safe?
Money market funds are historically among the least-volatile types of investments. To understand how they can provide a safe place to hold your cash regardless of conditions in financial markets, it may help to look at how a fund works.
When you put cash into a brokerage account at Fidelity, the money goes into what is called your ”core position” until you use it for another purpose. You can find and change your core position on the Positions page of Fidelity.com.
Whether or not it remains in the core position, that money may be used to buy shares of a money market mutual fund. Money market funds are managed by investment professionals who rely on research and experience to make investment decisions, much like those who manage stock or bond mutual funds. However, while stock or bond funds' value may rise or fall on a daily basis, money market fund managers seek to maintain a stable net asset value (NAV) of $1.00.
Money market fund managers must follow rules set by the Securities and Exchange Commission (SEC). These rules are intended to promote the stability, liquidity, and transparency of money market funds. They require that money market fund managers only invest in debt securities that have short-term maturities and present minimal credit risk. SEC regulations require money market funds can only hold debt securities with maturities of 397 days or less and the overall fund must maintain a weighted average maturity of 60 days or less. To support liquidity, the rules also say that at least 30% of a fund's total assets must be invested in cash, Treasury bills, government agency debt that matures within 60 days or less, or securities that mature within 5 business days.
What's in your fund?
To understand how these rules are put into practice by a money market fund's managers, you can look at the securities the fund holds at any time on Fidelity.com: Money market funds. You can find your fund using the links at the bottom of this article, or input the fund's ticker symbol in the search box at the top of the Fidelity.com page.
Unless you've chosen a different option as your core position, the cash in your Fidelity nonretirement brokerage accounts may be held in the Fidelity® Government Money Market Fund (SPAXX).
SPAXX is a government money market fund that invests in Treasury securities, government agency securities, and repurchase agreements backed by government securities. Fidelity’s money market funds have been positioned to significantly limit, if not eliminate, exposure to Treasury securities maturing in the window in which the Treasury has stated that it is likely to exhaust all measures to repay its obligations. In addition, Fidelity’s money market funds are carrying liquidity levels significantly higher than their regulatory requirements. The majority of the portfolio is invested in repurchase agreements (repos) and government agency securities.
What is a repurchase agreement?
A repurchase agreement is a contract between a buyer and a seller for the sale and future repurchase of securities. On the effective maturity date, the seller repurchases the securities from the buyer, including a premium that is akin to accrued interest. Buying securities via repo agreements—often maturing the next day—is a relatively common practice by money market fund managers since it is generally low risk and generates short-term income and liquidity for the fund. Repos are also useful for money market fund managers because they offer rates that have remained attractive despite periods of volatility.
The repos that SPAXX invests in are collateralized by government securities. Collateral for Treasury repos is limited to securities issued by the US Treasury, whereas collateral for government repos can include Treasury securities as well as securities issued or guaranteed by government agencies, including, among others, Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. (Nontraditional repos involve a wider range of collateral.)
Fidelity’s money market funds only invest in repurchase agreements with the highest quality financial institutions, ones we would approve on an unsecured basis. The underlying collateral is valued daily and must meet contractual requirements establishing the type and value of collateral required for each transaction.
Liquidity as well as safety
Besides helping to keep your cash safe, Fidelity's money market funds are also managed so that you are able to access that cash regardless of what may be happening in financial markets. When personal needs arise, you may want to withdraw cash from your account. While SEC rules allow money market funds to restrict your ability to do that in times of market stress, Fidelity does not restrict your ability to withdraw cash from Fidelity® Government Money Market Fund (SPAXX) or its other government, Treasury, or Treasury Only money market funds even if their liquidity drops below the 30% regulatory requirement because of market conditions or other factors.
Money market funds may be appropriate if you have an investment goal with a short time horizon, low tolerance for volatility, or are looking to diversify with a more conservative investment. While the returns on money market funds are generally not as high as those of other types of fixed income funds, such as bond funds, they do seek to provide stability, and can therefore play an important role in your portfolio.
Keeping a long-term view
There will always be times of uncertainty. It's important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation. Ideally, your investment mix is one that offers the potential to meet your goals while also letting you rest easy at night.