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Short-Duration Bond ETFs in Spotlight on SEC Money Fund Proposal


The SEC on Wednesday announced a proposal that would require institutional money market funds to move to a floating net asset value. The regulator was also proposed liquidity fees and temporary halts of redemptions for money funds in certain situations.

The proposal could drive interest in short-duration bond ETFs as an alternative to money market mutual funds. ETFs in this category include 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). [Money Market Reform May Shift Cash to Short-Duration ETFs]

“A slice of the $2.6 trillion money market fund industry would be required to fundamentally change how they price their shares in an effort to reduce the risk of runs,” Reuters reported Wednesday.

“The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value – a change designed reduce the risk of runs like the ones during the 2008 financial crisis,” according to the report. Retail and government funds would not be forced to transition to a floating NAV. [Short-Duration ETFs Can Substitute for Money Market Funds]

“The second alternative in Wednesday’s proposal would allow funds to maintain a stable share price, but they could utilize so-called ‘liquidity fees and redemption gates’ during times of stress,” Reuters added. “The SEC said a 2% liquidity fee on redemptions could be imposed if a fund’s level of weekly liquid assets fell below 15%. If the fund crossed this threshold, its board of directors would be allowed to impose the gates, or a temporary suspension of redemptions.”

The SEC’s extensive plan voted on Wednesday is only a proposal, and if it is passed it will face months of public comment before a final vote, The New York Times reported.

Money market funds are essentially yielding nothing with the Federal Reserve keeping short-term rates near zero. However, investors like the safety of parking their cash in money funds because they know at least they know they can’t lose money due to the stable NAV. However, if institutional money market funds are forced to move to a floating NAV, that would take away a key advantage. This in turn could cause more institutions to consider short-duration bond ETFs. [SEC Money Market Fund Reform Drives Interest in Short-Term Bond ETFs]

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. 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.