With short duration funds being a recent trend in fixed-income exchange traded funds (ETFs), few of these ETFs actually invest like a real money market.

However, Murray Coleman for IndexUniverse reports that many industry observers believe more are on the way. Given the anticipation of these funds, questions arise about ETFs “poaching” money markets.

Despite the formation of these funds, none of these ETFs will be able to refer to themselves as money markets. As a result of regulation put into place by the Investment Company Act of 1940, specific rules designate what is and is not a money market fund, what it can and cannot invest in, and finally, the risks it can take.

More specifically, Rule 2a-7 allows for certain accounting procedures to make daily record keeping possible, in order to maintain the NAV of money market funds at $1/share. With ETFs, trying to avoid breaking a NAV of $1/share has become a serious accounting obstacle.

Despite the similarity of money market funds and short term fixed-income ETFs, the New York based lawyer involved in the creation of the first ETF, Kathleen Moriarty makes an interesting point. She points out that regulatory actions that have been put into place keep ETFs and mutual funds as distinct and separate products. She says, “Not being able to call an ETF a mutual fund–even though both are basically big baskets of stocks–hasn’t hurt the ETF industry at all.”

With more money market-like ETFs expected to be released, only time will tell if ETFs will “poach” money markets.

An ETF that falls into this category is:

• WisdomTree US Current Income Fund (USY), inception May 20, 2008

Tags | Money Markets, USY