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New Money Market Fund Rules, a Boon for Ultra-Short-Term ETFs


With the Securities and Exchange Commission adopting new reform rules for the $2.6 trillion money market fund market, large institutional investors could turn to easy-to-use, ultra-short-duration bond exchange traded fund as a suitable alternative.

The SEC is implementing new rules to deter runs in money market funds, similar to what happened during the height of the 2008 financial crisis, according to a SEC press release.

“Today’s reforms fundamentally change the way that money market funds operate,” SEC Chair Mary Jo White said in the press release. “They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.”

Specifically, the new rules require institutional prime money market funds to float their net asset value, which will allow the daily share price of the funds to fluctuate along with change sin the market-based value of fund assets, essentially breaking the so-called buck, or constant share price of $1.00, that many have come to expect.

Additionally, 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.

The final rules provide a two-year transition period to allow funds and investors to adjust for the changes. Funds targeted at retail investors will be exempt from the floating share price, but the rules affect institutional funds, except those that only hold federal government securities.

Critics have argued that customers could pull their money out of these money market funds after seeing their balance fluctuate under the new floating rates and move into other funds, separate accounts or high-yield fixed-income options, Financial Times reports.

Others, including the U.S. Chamber of Commerce, warn that the changes in the structure of the money market funds could cut off a major supply of short-term funding for corporations, Bloomberg reports.

With the additional rules tacked onto money market funds, more investors and institutions could turn to ultra-short-duration bond ETFs to park their cash. For instance, the actively managed PIMCO Enhanced Short Maturity ETF (MINT) has a 0.52 year duration and a 0.51% 30-day SEC yield, and Guggenheim Enhanced Short Duration Bond (GSY) has a 0.46 year duration and a 1.07% 30-day SEC yield. More recent additions to the space include the SPDR SSgA Ultra Short Term Bond ETF (ULST) , which has a 0.19 year duration and a 0.30% 30-day SEC yield, and iShares Short Maturity Bond ETF(NEAR) , which has a 0.94 year duration and a 1.11% 30-day SEC yield.

These active ETFs include a diversified mix of ultra-short-duration corporate and Treasury bonds in an attempt to provide greater income and total return than money market funds and short-duration T-Bills.

Alternatively, investors can look at conservative short-duration Treasury bond ETFs, such as the iShares Short Treasury Bond ETF (SHV) , which has an effective duration 0.37 years and 0.07% 30-day SEC yield, and the SPDR Barclays 1-3 Month T-Bill (BIL) , which has a 0.11 year duration and a -0.10% 30-day SEC yield. [Rising Rate Preparation With Short-Term Bond ETFs]

For more information on the fixed-income market, visit our bond ETFs category.

Max Chen contributed to this article.

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.