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Short-Duration Bond ETFs Eye Money Fund Reform


Short-duration bond exchange traded funds are beginning to look more attractive relative to money market funds as the federal government and regulatory bodies scrutinize vulnerability in the $2.7 trillion money fund industry.

The Financial Stability Oversight Council is calling for greater regulations to limit the risk to investors of money market funds, reports Mark Koba for CNBC. The FSOC is expected to announce changes in the coming weeks after hearing from the industry.

The move toward money market reform has been growing. Recently, all 12 Federal Reserve Bank regional presidents in a letter to the Financial Stability Oversight Council said they support money market mutual fund reform. [Short-Duration Bond ETFs: Fed Presidents Back Money Fund Reform]

Money market funds are seen as safe investments as investors can almost always buy and sell money market shares at $1. However, during the 2008 financial crisis, money market funds “broke the buck” after dipping below $1 on losses incurred from the Lehman Brothers bankruptcy, leading to a market run on the money funds.

In an attempt to obviate another run or collapse, regulators want to change the $1 per share value, or the net asset value, associated with money market funds, allowing the funds to “float” their NAV. Additionally, they are looking at the amount funds have in reserve.

Large money managers, though, argue that reforms would be too costly. Fund providers have also tried to delay reforms by offering greater transparency into their operations.

“If the goal is to reduce runs on money market funds, a floating NAV won’t accomplish that,” Jerry Klein, managing director of HighTower, said in the article. “The NAV barely moves anyway. A stable NAV actually creates market stability. A better solution is more transparency which is already happening. We’ve seen Goldman and BlackRock voluntarily disclose their mark to market (market place value) NAV every day.”

Alternatively, investors have taken a look at short-duration bond ETFs, including PIMCO Enhanced Short Maturity Strategy (MINT) , SPDR Barclays 1-3 Month T-Bill (BIL) , iShares Barclays Short Treasury Bond (SHV) and Guggenheim Enhanced Short Duration Bond (GSY) . [SEC Money Market Fund Reform Drives Interest in Short-Term Bond ETFs]

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.