If you've ever left cash sitting in a Vanguard brokerage account, you already own a money market fund. That's where Vanguard parks uninvested money by default. So what is a money market fund? It's one of the biggest places Americans keep cash outside a bank: $7.92 trillion as of the week ended Oct. 14, according to the Investment Company Institute, with $3.12 trillion of it in funds sold to individuals.
They also just got more useful. When the Federal Reserve raised rates on Sept. 16, money fund yields went up within weeks. Here's how they work, how safe they are, and the fee and tax details that decide what you keep.
What is a money market fund, exactly
A money market fund is a mutual fund that lends money for very short periods to borrowers who are extremely likely to pay it back. The main holdings are Treasury bills, which are short-term IOUs from the U.S. government, and repurchase agreements, or repos, essentially overnight loans backed by Treasury collateral.
Everything is short. Fidelity's SPAXX, which manages about $464 billion, held 34% of its portfolio in T-bills and 33% in government repos at the end of September. Its average holding matured in 37 days.
The goal is a share price that stays at exactly $1.00. You make money because the fund pays out its interest as new shares, not because the price rises. Put in $5,000 and you own 5,000 shares; a year later, at a yield around 3.6%, you'd own roughly 5,180.
Individual investors mostly choose among three types. Government funds must keep at least 99.5% of their assets in cash, government securities and repos fully backed by them. Vanguard's VMFXX and Fidelity's SPAXX are both government funds; the category holds $6.52 trillion of the $7.92 trillion total. Treasury funds are a stricter version that stick mostly or entirely to Treasury debt, such as Vanguard's VUSXX. Prime funds also buy short-term corporate debt and bank CDs, which usually pays a bit more but adds credit risk, and SEC rules let them charge a fee of up to 2% on withdrawals during a market crunch.
How money market funds pay interest
So how do money market funds pay interest? It accrues every day and gets paid once a month as a dividend, which most people have automatically reinvested into more $1 shares. Vanguard lists VMFXX's payout schedule as "monthly, accruing daily." Sell halfway through the month and you still keep the interest you earned up to that point.
The number to compare is the 7-day SEC yield: the fund's income over the past seven days, minus expenses, stated as an annual rate. Every fund calculates it the same way. Two caveats: it's a snapshot that changes daily, not a promised rate, and it isn't compounded, so it reads a little lower than a bank's APY. As of Oct. 16, VMFXX showed a 7-day yield of 3.82% and a compounded yield of 3.89%. Compare the second number with a savings account's APY.
That brings us to the Fed. On Sept. 16 it raised its target range a quarter point to 3.75% to 4.00%, its first hike since July 2023. Because money funds hold debt that matures in weeks, they roll into higher-paying T-bills and repos quickly. The Crane 100, Crane Data's average of the 100 largest taxable money funds, rose from 3.51% in the week ended Sept. 4 to 3.71% in the week ended Oct. 16. The Fed meets again Oct. 27–28 and Dec. 8–9. The speed works in reverse too: when the Fed cuts, money fund yields fall within weeks.
Are money market funds safe?
Safe, but not insured. A money market fund isn't a bank account, and the FDIC doesn't cover it. Fidelity's own fund page says it plainly: you could lose money.
People sometimes point to SIPC instead. SIPC protects up to $500,000, including $250,000 in cash, if your brokerage firm fails and your assets go missing, and it treats money market funds as securities. But SIPC "does not protect against the decline in value of your securities." If the fund itself loses money, SIPC doesn't help.
That has happened. In September 2008 the Reserve Primary Fund held $785 million of Lehman Brothers debt when Lehman went bankrupt. The fund "broke the buck," cutting its share price to 97 cents, and shareholders asked for about $40 billion back in two days. Investors pulled roughly $300 billion from prime funds that week. Before 2008, only one small money fund had ever broken the buck.
Regulators have tightened the rules twice since. In 2014 the SEC made institutional prime funds let their share prices float, while retail and government funds kept the stable $1. In 2023 it raised the share of assets funds must keep in cash or securities that turn into cash within a day to 25%, and within a week to 50%, up from 10% and 30%. It also scrapped rules that let funds temporarily freeze withdrawals.
Government funds sit at the safe end of all this. They hold U.S. government debt and loans backed by it, so a real loss would essentially require the Treasury to stop paying its bills. Fidelity also says its government and Treasury money funds won't charge a fee when you sell. Very safe still isn't guaranteed, but it's about as close as cash gets outside an FDIC-insured account.
Money market fund vs money market account
The names make this confusing. A money market account is a bank product. It's a deposit, like a savings account, and it's FDIC-insured. A money market fund is an investment you buy at a brokerage. They share a name and not much else.
| Money market fund | Money market account | |
|---|---|---|
| What it is | A mutual fund, which is an investment | A bank deposit |
| Where you get it | A brokerage like Vanguard or Fidelity | A bank or credit union |
| Protection | No FDIC; SIPC covers a brokerage failure, not losses | FDIC or NCUA, up to $250,000 per depositor, per bank, per ownership category |
| What it pays | Floats with short-term rates; VMFXX was 3.82% on Oct. 16 | Set by the bank; national average 0.63% on Oct. 19 |
| Tax form | 1099-DIV | 1099-INT |
| Getting cash out | Sell shares, then transfer to your bank | Transfer, and some come with checks or a debit card |
The rate gap is the big practical difference, though 0.63% is only the FDIC's national average and plenty of online banks pay several times more. A good high-yield savings account can land near a money fund's yield while keeping FDIC coverage. If you're also weighing locking in a rate, our high-yield savings vs CDs comparison walks through that trade-off.
VMFXX vs SPAXX: why fees matter
Every money fund charges an expense ratio, an annual fee taken out before the yield is reported. When two funds hold similar T-bills and repos, that fee is most of the difference between them.
Vanguard's VMFXX charges 0.11%. Fidelity's SPAXX charges 0.42%. Both are government funds. VMFXX's 7-day yield was 3.82% on Oct. 16; SPAXX's was 3.51% as of Oct. 18. That 0.31-point gap matches the gap in fees.
On $20,000, that works out to roughly $764 a year in VMFXX versus $702 in SPAXX, a $62 difference for holding much the same assets. Vanguard's Treasury fund, VUSXX, charges even less at 0.07% and showed a 3.89% yield on Oct. 16.
That doesn't make SPAXX a bad fund, and $62 isn't a reason to switch brokerages. SPAXX has no minimum, while both Vanguard funds require $3,000 to start. The point is to check the expense ratio before you pick, because it's the one part of a money fund's return you control.
The bigger leak is cash that isn't in a money fund at all. Some brokerages "sweep" uninvested cash into a bank deposit program instead, where the bank sets the rate. At E*TRADE, the Bank Deposit Program is the only sweep option for most clients, and it paid 0.01% APY on balances under $500,000 as of Oct. 19. On $20,000, that's $2 a year.
Buying a money fund works like buying any mutual fund: search the ticker in your brokerage account and enter a dollar amount. At Vanguard, the settlement fund is VMFXX, so cash lands there on its own. Elsewhere, check what your "cash" actually is. If it's a bank deposit or sweep paying close to zero, buy a money market fund with the cash you plan to keep there.
Taxes, and where a money fund fits
The IRS says to report money market fund payouts as dividends, not interest, so they show up on a 1099-DIV. But they come from interest on short-term debt, so the federal government taxes them at your ordinary income rate, the same as savings account interest.
State taxes are where the fund type matters. Interest on Treasury debt is exempt from state and local income tax, and a fund can pass that break along for the share of its income that came from U.S. government obligations. For 2025, Vanguard reported that 100% of VUSXX's dividends came from those obligations, versus 66.61% for VMFXX, which holds repos and other assets that don't qualify.
It isn't automatic. You multiply your fund's ordinary dividends by that percentage and subtract the result on your state return. California, Connecticut and New York allow it only if at least 50% of the fund's assets were U.S. government obligations at the end of every quarter; Vanguard says both funds met that bar for 2025. On $20,000 in VUSXX at 3.89%, about $778 a year, a 5% state tax rate works out to roughly $39 saved. Our guide to I bonds and Treasury bills covers the same state-tax break when you buy T-bills directly.
A money market fund is a good home for cash you'll need in the next few years but don't want earning the 0.07% national average on interest checking: an emergency fund kept at a brokerage, a down payment, or money waiting to be invested. It isn't built to grow wealth over decades, and its yield drops whenever the Fed cuts.
This week, find out where your brokerage cash actually sits. Then compare the 7-day yield and expense ratio of the fund you're in, and if you pay state income tax, see whether a Treasury fund comes out ahead.