Short-Duration ETFs vs. Money Market Funds

ETF Trends

Short-duration ETFs give investors a relatively safe place to park cash but they shouldn’t expect much in the way of yield with interest rates so low.

ETFs in this category include PIMCO Enhanced Short Maturity Strategy (MINT), SPDR Barclays 1-3 Month T-Bill (BIL), iShares Barclays Short Treasury Bond (SHV) and Guggenheim Enhanced Short Duration Bond (GSY).

MINT is an actively managed ETF from PIMCO that holds $1.9 billion of assets. It has a 30-day SEC yield of 0.75%.

Short-duration ETFs tracking indices are “about as safe an investment as a long-term investor can make,” says Morningstar analyst Timothy Strauts.

Since they track the very short end of the bond market, they offer very low interest payments.

“The yield is very similar to money market yield, and there is little opportunity for capital appreciation,” Strauts wrote in an analyst report.

“With many money market bank accounts paying just a small fraction of a percent in interest, investors continue to look for similar safe investments that provide a better yield,” writes David Zanoni at Seeking Alpha.

“The Guggenheim Enhanced Short Duration Bond ETF (GSY) yields 0.45%,” he wrote. “Although not a spectacular yield, it does pay better than many bank money market deposit accounts.”

However, Zanoni notes that ETFs charge expense ratios, while online searches turn up money market funds with yields slightly over 1%.

“Another reason to go with the bank money market accounts is the fact that they are FDIC insured which provides an extra dose of comfort or peace of mind,” he said.

In August, SEC Chairman Mary Schapiro called off an SEC vote on proposed new regulations for money-market funds, CFO.com reports. The proposal would have required funds to adopt a “floating” net asset value, meaning a fund’s NAV would rise and fall daily; forced money funds to accumulate a capital reserve to cushion against losses; and required investors seeking to redeem their shares to wait 30 days to get back 3% to 5% of their principal.

Short-duration ETFs can see their share prices fluctuate, while money market funds are designed to maintain a net asset value of $1, although financial crises have caused some funds to “break the buck.”

PIMCO Enhanced Short Maturity Strategy

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The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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