New Vanguard Fund Designed for Short Term Investments

Vanguard, the low-cost investment platform and funds manager, has announced the introduction of a new fund designed for shorter term investments. The Vanguard Sterling Short-Term Money Market Fund is the investment company’s first UK-domiciled money markets product and is designed to be compatible with retail, professional and institutional clients. It charges a 0.15% fee and is targeting an initial yield of 0.55% to 0.6%.

That yield might seem low, because it is, but the nature of the fund is to be as low risk as possible for an investment product. Vanguard is most famous for its ultra-cheap index-tracking funds. In fact, the company’s founder, the late John ‘Jack’ Bogle is renowned for being the first to create an index-tracker offered to retail investors. Launched in 1976, Vanguard’s first tracker was built to reflect the performance of the S&P 500.

Before that, index tracking products were only available to institutional investors. Bogle was firmly of the opinion that less experienced, amateur investors should not risk their long term savings through the risky approach of ‘stock picking’ themselves. And that the fees charged by actively managed funds did not, on average, justify their performance which more often than not did not outperform their benchmark index. Overall, said Bogle, small investors would do better by simply tracking those benchmarks. And passive tracker funds that did exactly that could charge very low fees because they don’t have the expense of active management. In the years since, index funds have grown into a $10 trillion market.

The new Vanguard fund is not, however, an index tracker but is actively managed. That’s because it is designed for investors who want to put their cash into a short-term, low-risk, liquid investment as an alternative to just parking it in the bank. That could be because they are saving up for a new car, or a wedding or something else with a time horizon of a few months to a couple of years. The investment needs to be highly liquid so it can be immediately cashed in when required and also low risk so financial markets volatility is unlikely to mean the investment is worth less than the cash put into it at any given moment. Long term investments can ride out market dips so investors don’t have to worry about them too much.

To achieve that aim, short term money market funds, including the new Vanguard Sterling Short-Term Money Market Fund, typically invest in low risk fixed income securities such as government and investment grade corporate bonds, cash and various other money market securities like reverse repurchase agreements.

The intended result is, if all goes well, a slightly better yield than what would be achieved by parking the money in the bank at only a slightly higher risk level. It should, however be noted, that even low risk investment products do carry some level of risk and it is possible that the value of the investment drops below the initial investment value under unfortunate market conditions.

Another option for short-term investors is short term bond ETFs which invest in bonds with a maturity date of between 1 and 3 years. There are also ultra-short term bond ETFs that invest in bonds with a maturity date of up to a year. These short-term investments would, under typical circumstances, be expected to yield higher returns than a short-term money markets fund but at a slightly higher level of risk.