If you hold cash at Vanguard, this is the matchup you actually face. VMFXX, the Vanguard Federal Money Market Fund, is the default settlement fund in your account, so any uninvested cash already sits there earning yield. SGOV is the iShares 0 to 3 Month Treasury Bond ETF, which holds short-term T-bills and trades like a stock. Both are about as safe as cash gets. So which should hold your money?
The fee difference is almost nothing. The tax difference is not, and for most people it is the whole decision.
The Two Funds, Side by Side
| Factor | SGOV (ETF) | VMFXX (money market) |
|---|---|---|
| Fee | 0.09% per year | 0.11% per year |
| What it holds | 0 to 3 month US T-bills | US government securities and repurchase agreements |
| Share price | Floats slightly | Stable $1 |
| Where you can hold it | Any brokerage | Vanguard only |
| Cash sweep | You place a trade to buy in | It is the settlement fund. Cash earns automatically |
| State tax on income | Almost fully exempt | Partial. The repo portion does not qualify |
| Minimum | One share (~$100) | $3,000 to buy directly ($0 as the sweep) |
The Fee Gap Is a Rounding Error
VMFXX charges 0.11%, SGOV charges 0.09%. That two basis point difference is $2 a year per $10,000. On a $50,000 cash position it is $10 a year. This is not the number to make a decision on. Anyone telling you to switch funds to save two basis points is optimizing the wrong variable.
Convenience Goes to VMFXX (If You Are at Vanguard)
Because VMFXX is the settlement fund, it is effortless. Cash from a deposit, a dividend, or a sale lands and immediately earns the money market yield, with no trade to place. When you want to buy a Vanguard fund, the cash is already there. SGOV requires you to buy in, and when you sell, the proceeds settle the next business day before you can redeploy them. For an active Vanguard account, VMFXX is simply less friction.
Taxes Go to SGOV, and That Is the Real Decision
Here is the part that flips it for a lot of people. Treasury income is generally exempt from state and local income tax. SGOV holds actual T-bills, so nearly all of its income qualifies for that exemption. VMFXX holds a meaningful slice of its portfolio in repurchase agreements, and repo income generally does not qualify. So only part of VMFXX's payout is state-tax-exempt, and that qualifying percentage changes from year to year and is often well below 100%.
If you live in a state with no income tax, ignore all of this and let convenience win. If you live in a high-tax state like California or New York, SGOV's larger state exemption can be worth more than VMFXX's two basis point lower fee and its convenience combined. Compare the two on an after-tax basis, not on the headline yield, because the headline yield hides the part the state takes back. For the full rundown by state, see the SGOV state tax breakdown.
The Short Version
- VMFXX (0.11%) is Vanguard's settlement fund. SGOV (0.09%) is a Treasury ETF you can hold anywhere.
- The two basis point fee gap is about $10 a year on $50,000. Not a deciding factor.
- VMFXX wins on convenience at Vanguard, because cash earns automatically as the sweep.
- SGOV's income is almost fully state-tax-exempt. VMFXX's is only partially, because of its repo holdings.
- High state tax: SGOV often wins after tax. No state tax: VMFXX's convenience usually wins.
Not sure a fund is even the right move versus buying bills yourself? See SGOV vs buying T-bills directly. Comparing SGOV to money market funds in general, not just Vanguard's? See SGOV vs money market funds.
Common Questions
Should I hold cash in SGOV or VMFXX at Vanguard?
It comes down to convenience versus state taxes. VMFXX is Vanguard's default settlement fund, so cash earns automatically the moment it lands, with no trade to place, which makes it effortless for an active account. SGOV holds actual Treasury bills, so almost all of its income is exempt from state and local tax, while VMFXX is only partially exempt because it holds repurchase agreements. In a no-income-tax state, let VMFXX's convenience win. In a high-tax state like California or New York, SGOV's larger state exemption can outweigh both the convenience and the small fee difference.
What is the fee difference between SGOV and VMFXX?
VMFXX charges 0.11% and SGOV charges 0.09%, a difference of two basis points, or about $10 a year on a $50,000 cash position. That gap is too small to drive the decision. The meaningful difference between the two is not the fee, it is how their income is taxed at the state level and how convenient each is to hold.
Is VMFXX income exempt from state taxes?
Only partially. VMFXX holds a meaningful slice of its portfolio in repurchase agreements, and repo income generally does not qualify for the state-tax exemption that applies to direct Treasury income. So only part of VMFXX's payout is state-tax-exempt, and the qualifying percentage changes year to year and is often well below 100%. SGOV holds actual T-bills, so nearly all of its income qualifies. In a high-tax state, that difference can be worth more than VMFXX's slightly lower fee.
Is SGOV or VMFXX more convenient to hold?
VMFXX, if you are at Vanguard. Because it is the settlement fund, any cash from a deposit, dividend, or sale lands and immediately earns yield with no trade required, and it is already in place when you want to buy another Vanguard fund. SGOV requires you to place a buy order to get in, and when you sell, the proceeds settle the next business day before you can redeploy them. For an everyday cash bucket at Vanguard, VMFXX is less friction.
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