The Federal Reserve expressed concern that money market mutual funds and exchange traded funds could be vulnerable to stress during calamitous market environments, according to a monetary policy report released Tuesday.
News of the Fed’s view regarding the vulnerability of money market funds, including ETFs, was originally reported by Pedro da Costa of the Wall Street Journal.
“Prime money-market funds with a fixed net-asset value remain vulnerable to investor runs if there is a fall in the market value of their assets,” the Journal reported, citing the Fed.
The Fed’s view on money market funds comes as some issuers are reconfiguring such funds to meet new regulatory standards. Fidelity Investments is converting a few of its money funds. Investors who are wary about regulatory repercussions can also turn to ultra-short-duration bond exchange traded funds as cash alternatives.
The changes are coming ahead of new regulations the Securities and Exchange Commission approved that will take effect in October 2016, which require institutional prime funds and institutional municipal money market funds to allow a floating net asset value, essentially breaking the buck or stable $1 share price many have known. [A Look at Money Market ETFs]
Due to a mix of lower fees and intraday trading, money market ETFs have become increasingly popular with investors. The PIMCO Enhanced Short Maturity ETF (MINT) is the largest actively managed ETF in the U.S. with over $4 billion in assets under management.The Guggenheim Enhanced Short Duration Bond (GSY) , with a duration of just 0.25 years, is home to $430.1 million in assets.
Money market fund boards can impose fees or so-called gates during periods of distress. If a fund’s level of weekly liquid assets dips below 30% of total assets under management, the fund could impose a liquidity fee of up to 2% on all redemptions. [New Money Market Rules a Boon for Some ETFs]
However, the Fed is concerned about the growth of money market mutual funds and ETFs.
“As mutual funds and ETFs may appear to offer greater liquidity than the markets in which they transact, their growth heightens the potential for a forced sale in the underlying markets if some event were to trigger large volumes of redemptions,” the Journal reported, citing the Fed report.
MINT and NEAR have added $191.1 million and $25 million, respectively, in new assets this year.
PIMCO Enhanced Short Maturity Strategy ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.