How do money market funds like SPAXX calculate interest distributions?

[aws]

Now that interest rates are getting to be substantial I wanted to make sure I understood how money market funds work for the buyer. I understand the funds earn income buying t bills and other short term government securities, but the mechanics of how this income is distributed fairly is confusing. Is interest calculated in such a way that you are paid for the average daily balance, and if so how do they accomplish that?

 

Savings accounts make sense as the bank can calculate your balance and interest daily.

 

Short-term bond ETFs like SHV make sense in that they creep up slowly over the month and then go ex-div to drop back down. So if you buy right before the payout you are paying more than if you bought earlier in the month and that squares up the interest income.

 

But my SPAXX pays out a seemingly fixed amount per $1 share to all holders (0.002207413 for the month of October). What would stop someone from buying a large amount on the 30th of the month, collecting the monthly payout, and then converting the holdings into something else on the first of the next month? It seems like fair value of the money market fund should really be very slightly above or below $1 depending on the day of the month to account for accrued interest, but since you always can buy or sell at par those discounts or premiums are never visible. Is there some mechanism like with the other vehicles to make sure the interest received is "fair"? I imagine there must be for a trillion dollar market but I can't figure how it would work.

 

[johnpane]

In order to maintain the $1.00 value, interest does not accrue to NAV but is held separately and distributed proportionately to the how long the shares were held. If a person redeems mid-month they still get the accrued interest. This is in contrast to, for example, a very short-term bond fund, where NAV does reflect accumulated interest and there is no partial-month interest payment upon redemption.

Edited November 5, 2022 by johnpane