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As SEC Tinkers with Money Market Funds, Look to ETFs

editor@etftrends.com (ETF Trends)

In attempt to obviate another debacle in money market funds after the financial downturn, the Securities and Exchange Commission is expected to implement a round of new rules in mid-October that could change the way the $2.7 trillion industry works.

This could potentially trigger billions in outflows from these traditionally safe investments and opening up opportunities in cash-alternatives like ultra-short-duration bond exchange traded funds.

Money market funds typically hold short-term corporate and municipal debt to help investors, typically large institutions and pension funds, park their cash at a better rate than a savings account.

Since the 2008 financial crisis when the share price of one fund dipped below a dollar and triggered widespread financial panic, these money market funds now follow more stringent regulatory rules, like taking on less credit risk or holding more cash to meet redemptions.

To the dismay of some investors, the SEC’s new rules will allow the value of shares on prime institutional money-market funds, which invest in short-term corporate debt and are geared toward large investors, and institutional municipal money-market funds to fluctuate along with current market prices of their underlying holdings, essentially “breaking the buck” that so many have relied upon – these money market funds have traditionally sought a stable net asset value, or NAV per share, of $1.00.

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Prime and retail money market funds aimed at retail investors will still maintain their $1 net asset value. However, the kicker is that they may impose redemption fees, or so-called fee gates, and other restrictions like temporary suspensions on the sell side during times of market distress.

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. Moreover, all money funds, except government funds, will be required to impose a 1% fee on redemptions if the weekly liquid assets slip below 10% at the end of the day.

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The regulatory changes are seen as a direct response to the 2008 depression when Reserve Primary Fund broke the buck or fell below $1 due to losses it incurred on Lehman Brothers debt, which triggered huge redemptions and a government intervention to stem the bleeding. The SEC hopes that the new rules will diminish the chance of a repeat run on the money.

Needless to say, some may not find these changes too appealing and could move billions of dollars out of these private credit markets in response. For instance, according to the Investment Company Institute data, prime funds have already seen assets decline to $967 billion from $1.3 trillion in March, and institutional tax-exempt funds now hold about $44 billion from $60 billion in Mach.

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However, the new regulatory rules may be a boon for bond ETFs as a cash alternative. Investors who are seeking money fund substitutes may look to actively managed, ultra-short duration bond ETFs that are more free to adapt holdings in a shifting market environment.

For example, the PIMCO Enhanced Short Maturity ETF (MINT) has a 1.12% 30-day SEC yield and a 0.28 year duration. The Guggenheim Enhanced Short Duration Bond (GSY) has a 1.16% 30-day SEC yield and a 0.25 year duration. The SPDR SSgA Ultra Short Term Bond ETF (ULST) has a 0.96% 30-day SEC yield and a 0.31 year duration. The iShares Short Maturity Bond ETF(NEAR) has a 1.15% 30-day SEC yield and a 0.41 year duration.

Potential investors should be aware that these active ultra-short-term bond ETFs include corporate debt exposure with some lower quality investment-grade debt exposure, which may have contributed to their relatively higher yields.

Additionally, investors can look at conservative short-duration Treasury bond ETFs, such as the iShares Short Treasury Bond ETF (SHV) , which has an effective duration of 0.41 years and 0.26% 30-day SEC yield, and the SPDR Barclays 1-3 Month T-Bill (BIL) , which has a 0.13 year duration and a 0.13% 30-day SEC yield.

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.