Money Market Fund Regulation and Vanguard

A Friday’s The Wall Street Journal article* notes that the SEC is planning to reduce required reliance on credit ratings or money-market funds. It would allow U.S. money-market funds to invest in short-term debt without regard to ratings put on those securities such as Moody’s S&P, or Fitch Ratings. The proposed requirement relaxation would give more discretion to money-market fund managers in determining whether a security is grade or sub-investment grade.

But John Brennan, CEO of Vanguard, says that Vanguard “strongly opposes the commission’s proposal to eliminate references to credit ratings in Rule 2a-7—a rule that has provided a strong regulatory framework for money-market funds since its adoption 25 years ago.”

Brennan continues, “It’s our view that the proposed elimination of…ratings would remove an important investor protection from Rule 2a-7, weaken investment standards, and, potentially, pose a risk to the long history of stability of the $3.5 trillion money-market-fund industry.”

Let’s remember that it was money managers reaching for returns beyond what asset categories historically returned (and leveraging heavily to do it) that contributed to our current credit crisis. (See Interest Rates, the Credit Crisis and You.)

Money-market funds are essentially short-term debt instruments offering the security and safety of this asset class. Their low risk and volatility corresponds to their relatively low return. If higher returns are required for an investor, there are still the higher-risk/higher-return asset classes of longer-term bonds, non-U.S. bonds, U.S. stocks, non-U.S. stocks, real estate securities and commodity linked securities.

Interesting—a mutual fund company arguing for greater supervision of the industry. Vanguard has always been known as an investor-friendly company, and this is the reason it is generally at the top of my list for funds in any asset class.

So here’s a list of Vanguard money-market funds with some figures. Note their low cost relative to other money-market funds.**

Vanguard Prime Money Market Fund (VMMXX)
1-Year Return: 3.85%
1-Year Category Average Return: 3.25%
5-Year Average Annual Return: 3.23%
5-Year Category Average Annual Return: 2.63%
Expense Ratio: 0.24%

Vanguard Federal Money Market Fund (VMFXX)
1-Year Return: 3.73%
1-Year Category Average Return: 2.98%
5-Year Total Average Annual Return: 3.17%
5-Year Category Average Annual Return: 2.62%
Expense Ratio: 0.24%

Vanguard Treasury Money Market Fund (VMPXX)
1-Year Return: 3.20%
1-Year Category Average Return: 2.33%
5-Year Total Average Annual Return: 2.92%
5-Year Category Average Annual Return: 2.37%
Expense Ratio: 0.24%

Vanguard Tax-Exempt Money Market Fund (VMSXX)
1-Year Return: 2.84%
1-Year Category Average Return: 2.23%
5-Year Total Average Annual Return: 2.43%
5-Year Category Average Annual Return: 1.83%
Expense Ratio: 0.10%

*From The Wall Street Journal, “Vanguard Slams SEC’s Rating Proposals,” by Duncan Ferr, Friday August 22, 2008.

All figures are from Vanguard, August 23, 2008.