(PUB) Investing 2016

MONEY MARKETS Billions In, Billions Out at Vanguard

BILLIONS OF DOLLARS are sloshing into and out of Vanguard’s money mar- ket funds as investors and fund firms wrestle with new SEC rules taking effect in October. Billions per month are being sucked out of money market funds that invest mainly in short-term debt issued by companies, and poured into funds focused on government debt. The SEC’s rules are meant to make money market funds safer, but have set off a slew of unintended consequences. As a quick reminder, the SEC rules will mainly impact institutional inves- tors, as the money market funds you and I can use will continue to be priced at $1.00 per share day in and day out— no variable pricing for us individuals. If money market funds for individuals will have stable NAVs, why are we see- ing the shift toward government money markets? Well, in times of stress, prime money funds may suspend redemptions or levy a fee against investors taking money out of the fund. Government money funds aren’t subject to those regulations—so despite lower yields, money is moving to where the fewest changes are expected. Driving these huge cash disloca-

Vanguard Money Market Funds Net Cash Flows

2016 Net Flow

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

Treasury Money Mkt. Federal Money Mkt. Prime Money Mkt. Tax Ex. Money Mkt.

$272 $326

$210

$160

$163

$359 $1,111

$2,601

$464 $848 $2,024 $3,758 $2,316 $5,884 $7,406 $22,700

$1,080 ($575)

$160 ($3,050) ($1,656) ($4,563) ($4,216) ($12,820)

($781) ($187) ($228) ($273)

($4) ($249) ($276) ($1,998)

California Tax-Ex. Money Mkt. New Jersey Tax-Ex. Money Mkt. New York Tax-Ex. Money Mkt. Ohio Tax-Ex. Money Mkt. Pennsylvania Tax-Ex. Money Mkt. Note: Amounts listed are millions of dollars.

($65) ($20) ($17) ($16) ($40) ($21) ($14) ($11) ($45) ($28)

($43)

($88) ($31) ($36) ($15) ($37)

$2

$19

$36

($159) ($130) ($207) ($73) ($196)

($5)

($13) ($14)

($25) ($32) ($11) ($49)

($24)

($66) ($16) ($10)

$2

($3)

($3)

($10)

($17)

flows for all of Vanguard’s prime and municipal money market funds, while the government funds have raked in billions. Despite the material outflow this year, Prime Money Market, with over $125 billion in assets, is still the firm’s largest money market fund by a long shot. Federal Money Market comes in second with $27.5 billion—though its assets have increased nearly six times since the start of the year. Frankly, I’m not worried about a Vanguard money market fund break- ing the buck. (I also wasn’t concerned about that in the past.) But the new rules are impacting the markets in ways that I doubt the SEC intended. n old age. They end when investors are euphoric and worried about missing out on gains—which doesn’t sound much like the sentiment I’m hearing these days. Meantime, the action has been in the bond market. So far, there have >

tions has been Vanguard’s decision, in response to the SEC rules, to consolidate all its brokerage sweep accounts into Federal Money Market , a process that has bedeviled many Vanguard clients as checks have bounced and balances have mysteriously disappeared and reap- peared. $13.5 billion has drained out of Prime Money Market over the past four months, while more than $19 bil- lion has sluiced into Federal Money Market. The table above shows net flows for Vanguard’s money market funds this year. (Note that I have combined the Investor and Admiral share classes of Prime Money Market.) You can see there have been net out- to claim the title of longest U.S. bull market, it will have to go another two years, until September 5, 2018, without a 20% decline, the mark of a bear market. Yes, another bear is coming—but as the saying goes, bull markets don’t die of

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the tooth and is “due” to end—soon, of course. The current bull market is 7.5 years old, so it has lasted longer than the “average” bull market. However,

Daniel P. Wiener - Senior Editor Jeffrey D. DeMaso - Editor/Research Director Seth H. Kennedy - Assistant Editor Amy Long - Vice President and Publisher Billy Currano - Senior Managing Editor David Clarfield - Managing Editor Rachel Johnsen - Editorial Assistant Louisa Dorado - Marketing Director Mary Southard - Marketing Director John Hall Design Group - Design and Production Fund Family Shareholder Association Member, Newsletter Publishers Association Daniel P. Wiener - Chairman James H. Lowell - President (www.FidelityInvestor.com)

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The Independent Adviser for Vanguard Investors • September 2016 • 3

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