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Scrutiny Over Money Fund Holdings Helps Short-Duration ETF Outlook


The Securities and Exchange Commission believes there is not enough diversification among money funds, adding onto the money market reform rhetoric and potentially putting more ammunition behind ultra-short-duration bond exchange traded funds.

According to the SEC, money funds rely on a small number of issuers, reports Peter Ortiz for Ignites. [Money Market Debate Puts Focus on Short-Duration ETFs]

Money funds can invest in securities linked to their parent issuers and parent affiliates but treats them as one entity when calculating the funds’ total exposure. However, parents and their affiliates are treated as separate entities under diversification requirements. [PIMCO Short-Duration ETF Tapped as Money-Fund Substitute]

“Half of the money market fund assets come from the top 25 parents, while the next 25 parents only add another ten percent,” according to an analysis by the SEC’s Division of Economic and Risk Analysis.

The SEC proposes limiting securities of any issuer to no greater than 5% of a fund’s assets and “treat certain entities that are affiliated with each other as single issuers when applying Rule 2a-7′s 5% issuer diversification requirement.” Industry observers, though, argue that tightening diversification requirements would crate a burden on funds.

“It means funds might have to trim some holdings and that it might be difficult for a fund to build a diversified portfolio because it will have to find something to replace the holdings that they trim,” Joan Ohlbaum Swirsky, of counsel at Stradley Ronon, said in the article.

Ohlbaum believes it could even force some managers to pick up lower-quality securities that they would have not considered.

“If you do have to invest more broadly, that raises the question of whether you are lowering your standards,” Ohlbaum added.

The SEC is also considering reforms that would float the net asset value on money markets. The talks have escalated after the financial crisis when some money funds dipped below the $1 mark, which fueled a run-on-a-bank scenario in the money markets as investors feared the safety of the asset.

Nevertheless, any changes in the money markets would be a boon for the growing fixed-income ETF market, notably short-duration bond funds as a cash alternative. Ultra-short-duration bond ETFs include:

  • PIMCO Enhanced Short Maturity ETF (MINT) : 0.58% 30-day SEC yield; 0.99 year effective duration.
  • Guggenheim Enhanced Short Duration Bond (GSY) : 0.37 year duration; 0.97% 30-day SEC yield.
  • iShares Short Treasury Bond ETF (SHV) : effective duration 0.43 years; 0.03% 30-day SEC yield.
  • SPDR Barclays 1-3 Month T-Bill (BIL) : effective duration 0.12 years; -0.07% 30-day SEC yield.

For more information on the money markets, 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.