Looking to make the most of your cash? Might want to skip that savings account. In October, the average US savings account was 0.46%, significantly below the 5.5% Fed Funds rate. As a result, savers have looked elsewhere to take advantage of higher rates.

Many turned to a time-tested investment, money market funds (MMFs), a popular alternative to CDs and bank accounts that invest in various low-risk, interest-paying assets like treasury, corporate and government bonds.

• In Oct. 2023, the 100 largest money market mutual funds averaged a yield of 5.19% (Crane Data).
• Since the start of 2020, the number of assets in MMFs has doubled to a record $5.6T.

Like mutual funds, MMFs can charge expense fees between 0.15% and 1.22% — eating into potential returns. While these investments are generally considered among the safest, they aren’t FDIC-insured.

MMFs vs. the S&P 500… Here’s the winner

With interest rates near zero before the Fed’s aggressive rate hikes, returns from equities had far surpassed MMFs’. But with interest rates at 22-year highs, MMFs became attractive for investors again — seen as a “no-brainer” compared to what banks are paying, per Allspring Global’s Senior Fund Manager (BBG). Compared to the S&P 500, it’s not so clear anymore:

• According to WSJ, Vanguard’s MMF had returned a total of 402% between 1981 and Sept. 2023 — while the S&P 500 had returned 3,500%.
• Wylie Tollette’s Chief Investment Officer told WSJ that “Money market funds are a rational place to be for the next six months. But over the long term, taking risks pays you more.”

Forward-looking: This year, MMFs have underperformed the S&P 500 — which is up 9% despite the recent pullback. Harris Financial Group told Bloomberg that “People have become so complacent in cash they’re missing out on” potential market returns. And whether MMFs remain a strong alternative in 2024 depends on where interest rates are headed.