Money Market Shares Below $1: Breaking the Buck Explained (2025 Insights & Prices)

What Does Breaking the Buck Mean?

Breaking the buck refers to the rare event when a money market fund’s net asset value (NAV) drops below the standard $1 mark. This situation arises when the fund’s income from investments fails to cover its operating costs or suffers losses. Typically, this occurs during periods of very low interest rates or when funds take on leverage that introduces capital risk to otherwise safe investments.

When breaking the buck happens, it signals potential losses for investors, as the value of their shares dips below the expected $1 per share, risking part of their principal.

Key Points to Remember

• Breaking the buck happens when a money market fund’s NAV falls under $1.
• This usually results from insufficient investment income to cover expenses or losses.
• It often indicates economic stress, as money market funds are generally considered low-risk.

How Money Market Funds Maintain Stability

Money market funds generally maintain a stable NAV of $1 by valuing assets at amortized cost rather than market value, supported by regulatory frameworks. This approach helps investors treat these funds as liquid alternatives to checking or savings accounts. For example, a fund with two million shares would maintain a $2 million valuation under normal circumstances.

Breaking the buck is an uncommon but serious event, reflecting financial distress since these funds invest in short-term, low-risk instruments like U.S. Treasury bills and commercial paper. Unlike bank accounts, money market funds are not FDIC insured but provide higher returns and liquidity, often including check-writing and easy transfer options.

Important Consideration

Breaking the buck is most likely when interest rates plummet or funds use leverage, increasing capital risk.

Historical Perspective on Money Market Funds

Introduced in the 1970s, money market funds popularized mutual fund investing by offering a stable $1 NAV. The first fund, the Reserve Fund, set this standard.

The first breaking the buck incident occurred in 1994 when the Community Bankers U.S. Government Money Market Fund liquidated at 96 cents due to derivative losses. More notably, in 2008, the Reserve Fund dropped below $1 following Lehman Brothers’ bankruptcy, triggering widespread investor panic.

In response, regulators implemented Rule 2a-7, enhancing money market fund safety by limiting portfolio maturity to 60 days and imposing stricter credit and investment guidelines.

Investing in Money Market Funds in 2024

Leading providers like Vanguard offer multiple money market funds priced at $1, including taxable and municipal options. Vanguard’s Federal Money Market Fund (VMFXX) is a top performer, delivering a 0.67% year-to-date return as of September 2022 and an average 3.88% return since 1981.

With about 139 holdings averaging 60-day maturities, this fund manages $214 billion in assets and charges a 0.11% expense ratio. It requires a minimum $3,000 investment and is considered Vanguard’s most conservative offering.

Why Does Breaking the Buck Occur?

Breaking the buck typically happens when a fund’s investment returns don’t cover expenses or losses, often influenced by broader economic challenges like prolonged low interest rates or recessions.

Is Breaking the Buck a Common Event?

No, it is quite rare. Money market funds are among the safest investment vehicles, making breaking the buck an infrequent but important risk to understand.

Vanguard’s Money Market Fund Options

Vanguard offers two taxable funds—the Federal Money Market Fund (VMFXX) and Treasury Money Market Fund (VUSXX)—plus three municipal funds: California Municipal (VCTXX), Municipal Money Market Fund (VMSXX), and New York Municipal (VYFXX).

Discover engaging topics and analytical content in Mutual Funds as of 10-08-2019. The article titled " Money Market Shares Below $1: Breaking the Buck Explained (2025 Insights & Prices) " provides new insights and practical guidance in the Mutual Funds field. Each topic is meticulously analyzed to deliver actionable information to readers.

The topic " Money Market Shares Below $1: Breaking the Buck Explained (2025 Insights & Prices) " helps you make smarter decisions within the Mutual Funds category. All topics on our website are unique and offer valuable content for our audience.