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SEC Money Market Fund Reform Drives Interest in Short-Term Bond ETFs


Short-duration bond ETFs such as PIMCO Enhanced Short Maturity Strategy (MINT) are getting a closer look from investors frustrated with rock-bottom yields in money market funds. Reports that the Securities and Exchange Commission is taking another stab at reforming the money fund business are also driving interest in the ETFs.

Other ETFs in the category include SPDR Barclays 1-3 Month T-Bill (BIL), iShares Barclays Short Treasury Bond (SHV) and Guggenheim Enhanced Short Duration Bond (GSY).

“With money-market mutual funds yielding almost nothing and potential new industry regulations looming, bank accounts and short-term bond funds are looking better,” according to The Wall Street Journal.

“The Securities and Exchange Commission is working to put together a proposal on new rules, which could make those fluctuations more visible,” the newspaper reported. “One measure considered by the agency in the past is to let money funds’ fixed share prices float each day, offering a truer glimpse of the actual divergence from their $1 target. The fluctuations could spook some safety-minded investors.” [Who’ll Tell Grandma Her Money Market Fund May Not Be Safe?]

The SEC could propose stricter rules for the $2.7 trillion money fund industry as soon as the first quarter.

Mary Schapiro, the SEC Chairman who stepped down in December, had pushed reform measures including a floating net asset value, or NAV, for money funds. It would be a huge change because investors like money market funds because they know at least they can’t lose money, however low the yields are. However, Schapiro didn’t have the backing of a majority of SEC commissioners so the proposals died over the summer of 2012.

Yet her replacement at the SEC, Elisse Walter, seems likely to revisit the issue of money market fund reform. [Are Short-Duration ETFs the ‘Heirs to Money Market Funds?’]

Although short-duration bond ETFs have received more attention due to speculation over the SEC’s next move on money market funds, they are still a relatively small part of the overall ETF business.

“There are just 12 of them, with combined assets of $29 billion,” the WSJ reports. “BlackRock and Federated Investors have been granted an exemption by the SEC to offer ultrashort-term bond ETFs, while Charles Schwab has filed for an exemption.”

MINT, the PIMCO ETF, “addresses the niche ground between money-market funds and short-term bond funds,” said David Falkof, Mornignstar analyst, in the article.

However, Matthew Tucker, head of fixed-income strategy at BlackRock’s iShares ETF unit, warned that investors should recognize that there is more price variability in an ultrashort bond ETF, because it doesn’t come with a stable share price like a money market fund.

Investors “shouldn’t be confused,” Tucker said in the WSJ story. “They have to understand they’re taking some risk.”

PIMCO Enhanced Short Maturity Strategy


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