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Money Market Reform Debate and Short-Duration Bond ETFs


Ultra-short-duration bond exchange traded funds have popped up as an alternative to money market funds as Fed leaders push for tighter rules while financial leaders point to increased costs.

The 12 heads of regional Federal Reserve bank warned that Securities and Exchange Commission’s proposed regulatory reforms in the $2.6 trillion money-market mutual fund industry is not enough, stating that the approach “seems imprudent,” the Wall Street Journal reports.

Specifically, the Fed believes that the SEC’s proposal to abandon the fixed $1 share price and to float the value on “prime” funds held by treasurers and institutional investors should also expand to retail investors. They argue that floating the net asset value would train investors to accept slight fluctuations in case the value dips below $1. [Floating Money Market NAV Makes Short-Duration ETFs Attractive]

“While retail investors did not en masse act on this incentive during the crisis, it seems imprudent to assume that their behavior in the future will be the same as in the past,” Eric Rosengren, president of the Federal Reserve Bank of Boston, along with 11 fellow Fed bank presidents, said in a note.

The Fed leaders are opposed to alternative reform options, including an imposed withdrawal fee or temporary block on redemptions.

“We continue to believe that the liquidity fees and temporary redemption gates alternative does not constitute meaningful reform and that this alternative bears many similarities to the status quo,” the Fed added.

Charles Schwab believes it will cost more than anticipated to meet the necessary compliance, stress testing and daily redemption limits, according to MFWire. Specifically, Schwab estimates it will cost $10 million to support a floating NAV system, $4 million to educate and train employees, and half a million in annual costs to maintain the changes. Schwab is also fine with the redemption fee but suggests increasing the limit to $5 million instead of $1 million. [Scrutiny Over Money Fund Holdings Helps Short-Duration ETF Outlook]

Fidelity Investments also calculated that the proposed industry reform could increase borrowing costs of U.S. municipalities by $13 billion, Reuters reports. Money market funds provide low-cost financing for U.S. states and cities through short-term debt they issue to fund municipalities.

Any changes in the money markets would support the growing fixed-income ETF market, notably short-duration bond funds as a cash alternative. Some ultra-short-duration bond ETFs include:

  • PIMCO Enhanced Short Maturity ETF (MINT) : 0.51% 30-day SEC yield; 0.99 year effective duration.
  • Guggenheim Enhanced Short Duration Bond (GSY) : 0.20 year duration; 0.93% 30-day SEC yield.
  • iShares Short Treasury Bond ETF (SHV) : effective duration 0.45 years; 0.01% 30-day SEC yield.
  • SPDR Barclays 1-3 Month T-Bill (BIL) : effective duration 0.12 years; -0.10% 30-day SEC yield.

For more information on money market reform, visit our money markets 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.