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Short-Duration Bond ETFs: Fed Presidents Back Money Fund Reform


The drumbeat is growing louder for more investors to consider short-duration bond ETFs with money market mutual funds facing the loss of some of their key competitive advantages.

All 12 Federal Reserve Bank regional presidents in a letter to the Financial Stability Oversight Council said they support money market mutual fund reform. The move provides cover for the SEC to pursue an overhaul of the huge money fund business.

“Money market mutual funds have no explicit capacity to absorb losses in the event of a decrease in the value of assets held within the fund’s portfolio,” said the Reserve Bank presidents in their joint letter.  “This structure gives rise to a risk of destabilizing money market mutual fund runs by creating a first mover advantage.”

Eric Rosengren, chief of the Federal Reserve Bank of Boston, submitted the letter on behalf of all 12 central bank presidents, the Boston Globe reports.

“Rosengren has been pressing for stronger rules for money market funds in the wake of the 2008 financial crisis and was supportive of efforts by former SEC chief Mary Schapiro to impose new rules. Schapiro’s effort failed, but the Financial Stability Oversight Council has proposed similar changes to enhance the safety of money markets,” according to the report.

“The status quo is not acceptable,’’ Rosengren told the Boston Globe. “Some kind of reform is needed” to reduce the potential risk in the system.

“Rosengren and the other presidents suggested that investment firms that sell money markets could choose among various alternatives,” according to a story posted on the newspaper’s website. “For instance, he said, a fund complex could offer money market funds with a floating price – rather than the traditional $1 per share model – and offer others on which it holds more capital, for safety.”

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 SEC 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). [SEC Money Market Fund Reform Drives Interest in Short-Term Bond ETFs]

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

Although money market funds are yielding essentially zero, some investors like them because at least they know they can’t lose money because the funds are required to maintain a $1 share value. A “floating” NAV for money funds would take away that safety and could make short-duration bond ETFs a more appealing alternative.

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.