Gyroscopic Investing

There are three differences between VMMXX and SHY:

- SHY buys treasuries with no credit risk, VMMXX buys commercial paper
- VMMXX is a money market charged with keeping its NAV pegged at $1, SHY is an ETF whose NAV can fluctuate
- SHY buys longer bonds (1.86 year avg. maturity vs. 54 days)

Browne's advice was to use a treasury money market fund for the cash portion, as that has neither credit risk nor interest rate risk.  The orthodox option at Vanguard is VUSXX, which is currently closed, but will probably reopen when rates rise again.

craigr suggested using 1-3 year treasuries as they tend to get higher yields than MMFs with only a modest amount of interest rate risk.  As a practical matter, short term treasury funds are more widespread with generally lower expense ratios than treasury MMFs.

Limiting a fund to treasuries "bulletproofs" it against a number of disasters. E.g. a large scale bank run, or a manager that chases yields into riskier securities such as credit default swaps.

IMO, VMMXX is alright, but the credit risk gives me pause.  I actually have a fair bit of my cash allocation in VMMXX but plan on moving that into something treasury-based next time I rebalance.

If you go the ETF route you might consider VGSH which trades free at Vanguard and tracks practically the same index as SHY.

Schwab now has a short term treasury ETF, SCHO, begun in August 2010. It has a 0.12% ER, and tracks Barclays 1-3 year Treasury Index, as does SHY.

I have decided to blend SCHO in with VFISX. Having taxable accounts at both Schwab and Vanguard, I can get each of those commission free.

In the absence of a Treasury Money Market Fund, I feel that this is a reasonable alternative.

I have also started using SCHO for a portion (35% or so) of the cash in some PP accounts I manage at Schwab.  There is a small amount of interest rate risk, but if you hold that portion through any rebalancing you are likely to recover the small losses through the slightly higher yield.