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VUSXX is one of the core and most popular money market fund offerings of Vanguard– with ~$60bn in total net assets.
Like other money market funds offered by Vanguard, VUSXX seeks to maintain a stable $1 net asset value (NAV) while offering a modest yield to its investors. However, unlike other money market funds offered by Vanguard, VUSXX invests almost exclusively in short-term US treasuries. As such, VUSXX is considered one of Vanguard’s most conservative investment options.
In today’s post, we’ll go over what is VUSXX, its pros and cons, and other factors you should consider before investing.
Key Takeaways
- VUSXX is a low-risk investment focusing on short-term U.S. Treasury securities
- The fund aims to provide current income with minimal risk and maintain a stable $1 NAV
- It features a relatively low expense ratio compared to similar investment options
What is a Money Market Fund?
Money market funds are a type of mutual fund that invests in short-term debt instruments, including commercial paper, CDs, and Treasury bills.
Investors use this kind of funds to provide a safe and liquid place for their money while hopefully earning a bit more than what they could get from the bank. Money market funds are regulated by the SEC, and; therefore, must follow strict rules to maintain a stable net asset value (NAV) of $1 per share.
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What is VUSXX?
VUSXX is a type of money market fund offered by Vanguard.
Vanguard offers a wide array of money market funds, including VMFXX, VMMXX, VMSXX, VCTXX, VYFXX and VUSXX. These funds all attempt to provide income while maintaining the primary objective of keeping a stable net asset value (NAV) of $1 per share.
However, VUSXX is different in that invests almost exclusively in short-term US treasuries. Specifically, the fund keeps a minimum of 80% of its assets in debt issued in US treasury securities and in repurchase agreements fully collateralized by US treasury securities (99.5% must be in cash, US government securities, and or repurchase agreements that are collateralized solely by US government securities or cash).
These contrast against Vanguard’s other money market funds, which invest in different short-term debt instruments. For example, VMSXX invests in short-term municipal securities, VCTXX invests specifically in California municipal securities, and VYFXX invests in short-term New York municipal securities.
As an investor, you’ll find that VUSXX is classified as a conservative fund because its share prices are expected to remain stable or fluctuate only slightly. This stability makes it an attractive option for individuals who seek to preserve their capital, while also earning modest returns from low-risk investments.
Comparison Chart to Other Vanguard Money Market Offerings:
| Fund Name | Expense Ratio | 7-day SEC Yield | Tax Exempt | Minimum Investment |
|---|---|---|---|---|
| Vanguard Treasury Money Market Fund (VUSXX) | 0.09% | 5.22% | No | $3,000 |
| Vanguard Federal Money Market Fund (VMFXX) | 0.11% | 5.29% | No | $3,000 |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.15% | 4.10% | Yes | $3,000 |
| Vanguard California Municipal Money Market Fund (VCTXX) | 0.16% | 3.22% | Yes | $3,000 |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 0.17% | 4.05% | Yes | $3,000 |
Advantages of VUSXX:
Safety
Given that the fund invests nearly exclusively in securities backed by the full faith and credit of the US government, the risk of default and the risk of loss of principal is exceptionally small.
Most analysts in fact consider US treasuries to be “riskless” given that it’s backed by the full faith and credit of the US government. Because VUSXX invests nearly exclusively in these securities, the risk of loss of principal due to default, a.k.a. credit risk, is near zero.
Debt instruments with longer terms until maturity are known to have greater interest rate risk (sensitivity of the value of the security to changes in underlying interest rates of the market).
Therefore, the shorter the term of securities held within the fund, the less interest rate risk the fund has. In this way, VUSXX is both safe from a credit risk point of view and an interest rate risk point of view.
Price Stability
The fund maintains a NAV of $1 per share, meaning that investors can always get back at least what they put in without any fluctuations in value. This effectively serves to provide perfect price stability.
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Income
The fund does in fact make income payments to investors. These income payments are generated from the interest payments and capital gains from its underlying securities. The fund distributes its income to shareholders on a monthly basis.
The fund’s performance can be measured by its yield which is defined as its annualized percentage rate of return based on the fund’s income and NAV.
Yield can vary depending on the market conditions and the fund’s expenses. As of September 20, 2023, the fund had a 7-day SEC yield of 5.2%, which is the annualized yield on the fund during the past 30 days.
Disadvantages of Investing in VUSXX:
Low Return
The returns of the fund are limited. The fund’s returns are inherently limited by the low rates of the underlying US treasury securities that it holds. With low risk comes low reward – therefore it is easy to see why effectively risk-free treasury securities have low expected returns.
Taxation
In comparison to some other money market funds (for example, those holding underlying municipal securities that are tax-advantaged), VUSXX’s underlying treasury securities produce income that is generally fully taxable at the investor’s ordinary income tax rate for federal tax purposes. Ordinary income tax rates are generally higher than capital gains tax rates. However, most states do not tax income from treasury securities.
Main Factors to consider before investing in VUSXX:
Investment Objective
The fund is a good place to park cash for short-term savings objectives for investors with modest performance goals. It is not a suitable fund for investors who have long-term investment horizons and want a meaningful amount of growth in their portfolios.
The fund does not provide any federal tax benefits since income from treasury securities is taxed at ordinary income rates for federal tax purposes. The fund does provide state tax savings in states that have income taxes since the income of most treasury securities is non-taxable for state income tax purposes. Other funds, such as Vanguard’s municipal fund money market provide greater tax savings, for investors focused on minimizing taxable income.
Risk Tolerance
The fund is suitable for investors who have a low-risk tolerance and are willing to accept lower returns in exchange for some extra stability and safety in their portfolios. However, for investors who have a higher risk tolerance and therefore a higher desire for growth, although VUSXX may be a reasonable place to temporarily place cash in between transactions, it wouldn’t be suitable as a long-term hold.
Fees and Expenses
As with the rest of Vanguard’s offerings, VUSXX is quite a cheap offering – with minimal expense ratios compared to other money market funds. However, the fund is not suitable for investors who are looking for a no-cost or negative-cost money market fund which does exist in the marketplace
Conclusion:
VUSXX is one of the core money market fund offerings from Vanguard. It is one of Vanguard’s offerings that focuses on short-term debt instruments backed by the full faith and credit of the US government. They are suitable for investors with short-term savings goals and low-risk tolerance for those funds.
The tax consequences of VUSXX are not as favorable as those of some of the other money market offerings of Vanguard including those with underlying municipal securities. However, tax consequences will depend further on the types of accounts that are used to hold these securities – money held in tax-advantaged accounts such as IRAs for example will not be affected by the somewhat unfavorable consequences.
Frequently Asked Questions
What is the yield history of VUSXX?
As the Fed has raised rates significantly over the past year, VUSXX’s rate in terms of 7-day SEC yield has increased significantly to 5.22% whereas the annualized yield over the past five years was 1.6% per year
Is VUSXX Tax-Exempt?
Not for federal tax purposes. The majority of income from the fund is not taxable for state tax purposes (see explanation below).
How is VUSXX affected by state tax?
Income generated from investments in repurchase agreements with the Federal Reserve is generally subject to state and local tax. Note that repurchase agreements are currently 3.5% of the fund’s holdings. The rest of the income from returns on treasury securities is tax-exempt for state purposes.
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What is the 7-day yield of VUSXX?
The 7-day yield of VUSXX is 5.22% as of 9.20.2023
9 thoughts on “VUSXX: What You Need To Know”
If you are in the top tax bracket, is there a reason to put funds in VUSXX or VMFXX rather than VMSXX (municipal)?
If the income is taxed at ordinary income tax rates (37%), better to take the roughtly 20% lower yield from VMSXX tax free?
It’s always worth doing the math for your specific situation. The yield from munis may be tax-free at the federal level, but you can only avoid state income taxes by owning muni bonds issued by your own state. That’s obviously a non-issue for those in states with no income tax.
-PoF
I noticed that the last semiannual report on VUSXX mentioned 56.5% of the fund was in repurchase agreements. Any ideas on why that swings to widely from that snapshot on February 28, 2023 to today’s 3.7%? https://personal.vanguard.com/funds/reports/q302.pdf?2210202589
Is VUSXX better compared to VMFXX?
Thank you for your comment. Please read the article we wrote about the subject: https://www.physicianonfire.com/vusxx-vs-vmfxx/
I think it’s a hidden perk of a lot of these brokerages, cash equivalents without FDIC insurance that have higher yields than at banks, but still, come with protection. Sure you can get 4.5% at the bank, the 7-day yields on these tend to be higher and more flexible, encouraging for those with brokerage accounts!
Thanks for the summary! Great article about an arguably extremely safe mutual fund that earns you roughly the fed funds rate on an ongoing basis. You say income is “not taxable in most states” what do you mean by that? I was under the impression (potentially incorrectly) that treasury bonds and bills are definitively tax exempt from all state and local income taxes (a hard line). I see your comment that fed reserve repurchase agreements are taxable at state level, but that’s a small 3.5% of the fund. Presumably the remaining 96.5% of the fund is in treasury bills that is fully tax exempt from state taxes, is that not correct? Thanks again!
Thank you for the comment.
The treasury bill (96.5%) is tax-free in all states. The way the quoted part was written early was trying to say that the fund only provided a tax benefit in most states (since some states don’t have income taxes the benefit does not apply to all states).
We see how the way it was worded could’ve made it confusing. The article has been updated to clarify.
We appreciate the feedback.
Great! Thank you so much for the clarification.