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Will ETFs Replace Money Market Funds?

tlydon@globaltrend.com (Tom Lydon)

U.S. regulators are already scrutinizing money market funds and even considering radical changes to one of the stable norms within the market. However, asset managers are already looking for a contingency plan in exchange traded fund products for potential changes.

Regulators are looking at money market funds as a potential bailout waiting to happen, similar to when the U.S. Treasury and the Federal Reserve intervened back in 2008.

SEC Chairman Mary Schapiro has been urging the commission to consider both capital buffer requirement and a 30-day hold back on redemption requests from investors, or to impose a floating net asset value, essentially breaking the buck on the $1-per-share value that current funds follow. [Short-Maturity ETFs Eye Money Fund Reform Gridlock]

Corporate and state treasurers expect to see increased costs from borrowing and tax accounting as a result if money market funds are allowed to float, reports Ari I. Weinberg for Forbes.

Consequently, more asset managers are considering short-maturity bond ETFs as a back-up plan – the ETFs are highly transparent, liquid and easily accessible, making them a clearer reflection of a basket of short-term debt.

ETFs would “force the markets to generate better liquidity in the underlying short term debt instruments, and, if this is a costly thing, to make both types of spread — bid/ask and mid-point spreads over treasuries — wider,” Harvard Business School Professor Ken Froot said in the Forbes article.

The average money-market fund now yields 0.03%, reports Sarah Max for Barron’s.

“People were either in money-market funds or bond funds,” Tony Davidow, portfolio strategist at Guggenheim Investments, said in the Barron’s article. “But with rates lower and lower, there is interest for this.”

Current actively managed short-term bond ETF alternatives to money market funds include:

  • Guggenheim Enhanced Ultra-Short Bond ETF (GSY) : 0.27% expense ratio; 0.42% yield.
  • PIMCO Enhanced Short Maturity Strategy Fund ETF (MINT) : 0.35% expense ratio; 1.02% yield.

Short-term Treasury bond ETF options include:

  • iShares Barclays Short Treasury Bond Fund ETF (SHV) : 0.15% expense ratio; 0.03% yield.
  • SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) : 0.13% expense ratio; 0% yield.

ETF providers are also trying to get a leg up on the potential regulation in money market funds, filing with the SEC for new ultra-short duration funds:

  • FlexShares Ready Access Variable Income Fund (NYSEArca:RAVI) would hold at least 65% of its portfolio in a non-diversified portfolio of fixed income instruments, like bonds, debt securities and other debt issued by the U.S., corporations and banks.
  • Legg Mason Western Asset Ultra-Short Duration ETF will be an actively managed fund that holds U.S. dollar-denominated, investment grade fixed income securities, such as corporate debt, bank obligations, commercial paper, asset backed and mortgage backed securities, structured securities and instruments and securities issued by the U.S. government. [ETFs Capitalize on Money Funds’ Uncertain Outlook]
  • Franklin Templeton Short Duration Government ETF will hold short duration fixed income securities, issued by the U.S. government.
  • Federated Active Ultrashort Fixed Income ETF is an actively managed fund that will try to outperform the 3-month LIBOR by holding fixed and floating rate fixed income instruments, including investment-grade and non-investment grade corporate bonds and U.S. debt.
  • iShares Ultrashort Bond Fund will include at least 80% of its portfolio in investment grade securities, such as corporate and government bonds, agency securities, instruments of non-U.S. issuers, privately issued securities, asset-backed and mortgage-backed securities, muni bonds, money market instruments and investment companies, rated a minimum of BBB- or higher

For more information on the money markets, visit our money markets category.

Max Chen contributed to this article.