Quick Answer: SPAXX pays interest monthly. While the interest accrues daily, investors receive the accumulated interest on the last business day of each month. This frequent payout makes SPAXX attractive for investors seeking regular income and easy access to their money.
If you want to boost your portfolio with consistent income, a money market fund like the Fidelity Money Market Fund (NASDAQ: SPAXX) could be a viable option. The fund invests in short-duration government debt, pays dividends monthly and has plenty of liquidity. In this article, you’ll learn how money market funds work and where SPAXX could fit into your financial plan.
Understanding SPAXX and Money Market Funds
What is SPAXX?
SPAXX is the Fidelity Government Money Market Fund, which invests primarily in short-term federal debt securities like U.S. Treasuries and government repurchase agreements. The fund aims to provide investors with monthly income while preserving capital. As a money market fund, SPAXX seeks to maintain a consistent share price of $1 by owning low-risk, short-duration assets and returning cash to shareholders each month.
How Does SPAXX Work?
SPAXX buys short-term Treasury bills and collateralized repurchase agreements and holds them until maturity. On average, SPAXX’s holdings take about three months to mature, and the fund returns the interest it earns to shareholders as a monthly dividend. The fund is composed of both fixed- and floating-rate securities. Because SPAXX invests in low-risk government debt, it’s a highly liquid and relatively safe investment, although money market funds lack Federal Deposit Insurance Corp. (FDIC) guarantees.
What Are the Benefits of Investing in SPAXX?
Minimal risk: By pegging its share price at $1, SPAXX attempts to preserve its investors’ capital. The interest rate may fluctuate, but the fixed share price and regulation force the fund to hold safe, short-duration instruments.
Consistent income: SPAXX returns cash dividends to shareholders each month. While the return rate isn’t fixed, the payment date is (the last business day of every month), so investors can depend on 12 timely annual payments.
No minimum: Some money market funds have a minimum initial investment as high as $3,000. SPAXX has no minimum, and investors can start with a small account.
Overview of Money Market Funds
Money market funds are investment pools like mutual funds that only buy short-term cashlike securities like Treasury bills, certificates of deposit (CDs) and commercial paper. Heavy regulation dictates which assets these funds can hold. The aim is to provide income and capital preservation to risk-averse individuals.
While money market funds are usually considered low risk, they aren’t impervious to losses in rare situations. During the Global Economic Crisis, the primary reserve fund broke the buck because of its Lehman Brothers Inc. commercial paper holdings. It dropped to 97 cents per share and was summarily liquidated after nearly four decades of operation.
Features of SPAXX
Review of SPAXX's Investment Objectives and Strategy
As a Fidelity investment product, SPAXX has two primary objectives: liquidity and preservation. The fund does not seek high rates of return, and its holdings are short-term, liquid and offered by a strong issuer. Rates of return are higher when short-term Treasury yields rise and lower when they decrease. Over 80% of the fund’s holdings are in government-backed securities with low default risk, and some commercial assets are held to manage interest rate risk.
Performance Analysis of SPAXX
Like all money market funds, SPAXX tries to keep its share price pegged at $1. However, the monthly interest amount fluctuates, and SPAXX has recently generated some of its best returns since its inception. SPAXX returned 5.01% over the last 12 months after a paltry 1.14% annual average over the previous decade. Since its 1990 inception, the fund has averaged a 2.63% annual return.
Comparison of SPAXX with Other Money Market Funds
How does SPAXX stack up against similar funds? Here’s a comparison with two other popular choices.
SPAXX vs. SPRXX
SPRXX is the Fidelity Money Market Fund that offers a more diverse asset pool, including commercial paper and CDs. The fund’s commercial paper holdings have more risk than the pure government portfolio of SPAXX, but rates of return can be higher. Both funds have a 0.42% expense rate.
SPAXX vs. FDRXX
FDRXX is the Fidelity Government Cash Reserves fund, one of the company’s oldest money market funds. Its holdings are similar to SPAXX but with more allocation to T-bills and less to repurchase agreements. The fund also has a cheaper 0.38% expense ratio.
Interest in SPAXX
Frequency of Interest Payments
How often does SPAXX pay interest? The fund managers compile interest from various investments and distribute the income to investors monthly. On the last business day of each month, SPAXX pays dividends based on the interest accrued during the period.
Explanation of SPAXX's Interest Payment Policy
SPAXX invests in short-duration government debt, but not every instrument has the same length or expiration. For example, the fund’s holdings currently have an average 36-day length to maturity and an average lifespan of 86 days. Because the assets earn different return rates and expire at various times, the fund accrues interest daily but only pays shareholders monthly.
Factors Affecting the Frequency of Interest Rates
The fund’s portfolio currently has a seven-day yield of 4.97%, but this number fluctuates based on various market conditions. For example, one- to three-month U.S. Treasuries currently yield about 5.4%, and short-term T-bills comprise over 33% of the fund’s holdings. The Federal Reserve heavily influences SPAXX’s return rates, followed by asset market demand and the fund’s operating expenses.
Strategies for Maximizing Returns
SPAXX's Approach to Interest Rate Management
The short-term nature of its holdings is key to SPAXX’s interest rate management strategy. Instead of picking and choosing the highest-returning assets, SPAXX seeks only the market return on its basket of short-duration securities.
For example, if rates rise, the fund will reinvest its maturing assets into new ones at a higher rate. If rates fall, the fund will still hold its higher-returning assets to maturity and then reinvest at the market rate. Thanks to the short shelf life of the underlying assets, interest rate risk is minimized.
Tips for Investors to Optimize Their Returns with SPAXX
- Diversify your assets: SPAXX offers a safe but uninspiring return, and investors may lose purchasing power in low-rate environments. A diversified stock, bond and cash portfolio is the best way to maximize your risk-adjusted returns.
- Monitor the market environment: Return rates on money market funds change based on interest rates. Because SPAXX holds government bonds, you’ll need to monitor the Federal Reserve's actions as changes in the Fed Funds rate can alter your monthly dividend payment.
- Don’t neglect tax planning: Dividends paid by SPAXX face ordinary income taxes, not capital gains taxes. Tax planning with a money market account is crucial because returns are low and tax-inefficient.
Considerations for Timing Investments
Buying SPAXX isn’t like buying a stock where you perform technical or fundamental analysis and open a position when a good entry point appears. SPAXX is a capital preservation vehicle that returns interest to shareholders and performs best when short-term interest rates are high.
If you’re approaching retirement, SPAXX could make sense as an investment strategy to reduce volatility and preserve capital while still earning interest. But when rates fall, so will the interest SPAXX generates, and investors could leave profits on the table by ignoring risk assets.
Conclusion
SPAXX is a money market mutual fund that holds almost exclusively short-term government debt securities like Treasuries and repurchase agreements. It is more like a bond than a stock, providing monthly interest payments while aiming to keep its share price at $1.
While money market funds are considered low risk, losses have occurred, and returns often lag assets like stocks over long periods. SPAXX is a cash-management vehicle, not a growth-producing asset, so always consider your overall risk tolerance and financial goals before changing your portfolio’s allocation.
Frequently Asked Questions
Is my money safe in SPAXX?
SPAXX invests in low-risk government debt and aims for capital preservation. While the risk of losing money is low, money market funds are not FDIC-insured, and investors can lose capital if the fund experiences a severe disruption.
Do I pay taxes on SPAXX?
Yes, the monthly dividends are subject to taxation, usually as ordinary income, because the fund holds short-duration assets until maturity. To defer or avoid taxes on SPAXX gains, you must keep the fund in a tax-advantaged account like a Roth IRA.
Should I hold money in SPAXX?
It depends on your investment goals and views on risk. If you’re a risk-averse retiree looking for monthly income, SPAXX could be a suitable investment. But if you want to build a nest egg and have a long time horizon, you might consider a vehicle with higher expected returns.
About Dan Schmidt
Dan Schmidt is a finance writer passionate about helping readers understand how assets and markets work. He has over six years of writing experience, focused on stocks. His work has been published by Vanguard, Capital One, PenFed Credit Union, MarketBeat, and Fora Financial. Dan lives in Bucks County, PA with his wife and enjoys summers at Citizens Bank Park cheering on the Phillies.