Short-Term Fed Funds: Smart Strategies For 100K Investors

Investing over $100,000 in short-term federal funds is a great way to diversify your portfolio and generate passive income. Before investing, it is important to pay off high-interest debt and set aside emergency funds. Short-term investments typically have lower returns than long-term investments but offer more stability and liquidity. Some of the best options for short-term investments include high-yield savings accounts, money market accounts, cash management accounts, short-term corporate bond funds, and certificates of deposit (CDs). These investments provide a balance between safety, liquidity, and modest returns. It is also crucial to understand your risk tolerance, investment goals, and time horizon before allocating your funds.

High-yield savings accounts

• LendingClub Bank: 5.30% APY
• BrioDirect: 5.15% APY
• Bread Savings: 5.10% APY
• EverBank: 5.05% APY
• Bask Bank: 4.85% APY
• CIT Bank: 4.85% APY
• Popular Direct: 4.85% APY
• PNC Bank: 4.65% APY
• CIBC Bank USA: 4.61% APY
• UFB Direct: 4.57% APY

These accounts are all FDIC-insured for up to $250,000, so your money will be safe, and they offer a good return on your investment with easy access to your cash.

It's important to note that the Federal Reserve decided to lower rates by 50 basis points in September 2024, so savings yields could decrease in the coming months. However, for now, these high-yield savings accounts are a great option for short-term investment.

Money market accounts

Money market funds are typically divided into three categories: government, prime, and municipal. Government funds invest in cash, U.S. Treasury securities, and repurchase agreements that are collateralized by U.S. Treasury securities. Prime funds, also known as general-purpose funds, invest in a mix of government securities and commercial paper, certificates of deposit, and short-term securities issued by domestic and foreign corporations. Municipal funds, also known as tax-exempt funds, invest primarily in securities that are exempt from federal income tax.

When choosing a money market fund, there are several factors to consider:

• Yield: Compare the fund's yield to others in the industry to ensure you're getting a good return on your investment.
• Expense ratio: All else being equal, a lower expense ratio is better for investors as it comes directly out of their returns.
• Type of fund: Decide whether you want to invest in a government, prime, or municipal money market fund. Municipal funds may be particularly attractive to those in high tax brackets.
• Other fees: Be aware of any additional fees charged by brokers or fund families, such as mutual fund commissions.
• Vanguard Federal Money Market Fund (VMFXX)
• Schwab Value Advantage Money Fund (SWVXX)
• JPMorgan Prime Money Market Fund (VMVXX)
• Invesco Government Money Market Fund (INAXX)
• Fidelity Money Market Fund (SPRXX)
• Vanguard Municipal Money Market Fund (VMSXX)

Short-term corporate bond funds

When considering a short-term corporate bond fund, it is important to look at the expense ratio or fee. The lower the expense ratio, the better the investment. Here are some examples of short-term corporate bond funds with low expense ratios:

• Vanguard Short-Term Corporate Bond Index/ETF (VSTBX): This fund has an expense ratio of 0.05% for the mutual fund and 0.04% for the ETF. It tracks the Bloomberg US 1–5 Year Corporate Bond Index, which consists of US investment-grade corporate bonds with one to five years of maturity remaining.
• PGIM Short-Term Corporate Bond (PSTQX): This actively managed fund has an expense ratio of 0.38%. It takes on more credit risk than other short-term bond funds but has performed well relative to other funds in the category.
• SPDR Portfolio Short Term Corp Bd ETF (SPSB): This fund has an SEC yield of 4.33% and an expense ratio of just 0.04%. It aims to track the performance of the Bloomberg U.S. 1-3 Year Corporate Bond Index.
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB): This iShares fund has an SEC yield of 4.38% and an expense ratio of 0.04%. It tracks the performance of an investment-grade corporate bond index with maturities between one and five years.

Short-term US government bond funds

When considering short-term US government bond funds, it is essential to prioritise funds with low expense ratios or fees. By minimising fees, investors can maximise their returns, which is especially important given the modest returns inherent in short-term bond funds.

• Vanguard Short-Term Treasury Idx Admiral: This fund has an expense ratio of 0.07% for the mutual fund and 0.04% for the ETF. It invests exclusively in short-term US Treasury bonds, offering minimal credit risk and muted interest-rate risk due to its focus on the short end of the yield curve.
• Schwab Short-Term US Treasury ETF: With an expense ratio of just 0.03%, this fund is a tough competitor in the short-term government-bond category. It tracks the Bloomberg US Treasury 1-3 Year Index, offering efficiency and low credit and interest-rate risk.
• SPDR Portfolio Short Term Treasury ETF: This ETF, managed by State Street, has an expense ratio of 0.03%. It invests in short-term US Treasury bonds, providing limited credit and interest-rate risk.
• Vanguard Short-Term Corporate Bond Index/ETF: This fund has an expense ratio of 0.05% for the mutual fund and 0.04% for the ETF. It tracks the Bloomberg US 1-5 Year Corporate Bond Index, providing access to short-term investment-grade bonds. While it takes on some credit risk, it offers accurate access to the market at a low cost.
• PGIM Short-Term Corporate Bond: With an expense ratio of 0.38%, this actively managed fund takes a longer-duration approach, focusing on corporate bonds rated A or BBB. While it takes on more credit risk, it has a strong long-term performance record relative to other funds in its category.

When investing in short-term US government bond funds, it is important to remember that these funds are not entirely risk-free. However, they offer a safer alternative to investing in high-yield bonds or the stock market. For those seeking even lower-risk options, money market funds are worth considering.

Money market mutual funds

Money market funds are not the same as money market accounts. Money market funds are a type of mutual fund, while money market accounts are a type of savings account. Money market funds are not federally insured, while money market accounts are insured by the FDIC. Money market funds are also not guaranteed to protect your principal, whereas money market accounts are.

There are three types of money market funds: government, municipal, and prime. Government money market funds invest in highly liquid, government-backed assets, such as cash, short-term US government debt, and repurchase agreements backed by government debt. Municipal money market funds invest in short-term municipal debt, and the income generated is exempt from federal income taxes. Prime money market funds invest in short-term corporate debt.

Money market funds typically invest in government securities, certificates of deposit, commercial paper, and other highly liquid, low-risk securities. They are designed to be low-risk, liquid, and short-term investments. The funds attempt to keep their net asset value (NAV) at a constant of $1 per share, so only their yields fluctuate.

When choosing a money market fund, it's important to consider the type of fund, the yields, fees, and expense ratios. It's also important to note that money market funds are not suitable for long-term investment goals, as they don't offer much capital appreciation.

Frequently asked questions