Money Market Rules May Boost Short-Duration ETFs

February 7th at 11:09am by John Spence

The Securities and Exchange Commission is set to announce a two-part plan to stabilize money market funds, The Wall Street Journal reported Tuesday. If approved, the proposals could hurt the performance of money market funds and make short-duration exchange traded funds a more attractive options for investors.

“The SEC’s aim is to minimize any losses for shareholders in the event of another financial panic,” the WSJ reported. Executives in the mutual fund business say the rules could lower returns for investors.

“The proposal, which is set to draw stiff opposition from financial groups and could create internal tensions at the SEC, would affect both fund firms and investors,” the newspaper said. “Firms would have to set aside capital reserves using one of three new methods. Investors who wish to sell all of their holdings at once would be able to get only about 95% of their money back immediately, with the remaining 5% returned to them after 30 days.”

If the rules end up going on the books, it could be a boon for short-duration ETFs such as PIMCO Enhanced Short Maturity Strategy (NYSEArca: MINT). [PIMCO’s Active ETF]

The PIMCO offering is an actively managed ETF designed as an alternative to money market funds. It holds about $1.5 billion in assets. [ETF Chart of the Day: PIMCO Enhanced Short Maturity Strategy]

“Stricter money market fund rules have artificially pushed down yields in short, high-quality debts, homogenizing money market funds,” Morningstar analyst Samuel Lee writes in a profile of the ETF. “There’s value just beyond money markets’ credit-quality and duration limits, and the actively managed PIMCO Enhanced Short Maturity Strategy exploits the gap. However, unlike money market funds, MINT doesn’t guarantee a fixed price level nor does it benefit from an implicit government backstop.”

He adds: “The SEC ratcheted down money market fund risk. This ETF avoids much of that regulation, allowing it to earn potentially higher returns.”

PIMCO’s fact sheet on the ETF describes the product as an actively managed fund that seeks greater income and total return potential than money market funds, which may be appropriate for non-immediate cash allocations.

MINT primarily invests in short-duration investment grade debt securities. “The average portfolio duration of MINT will vary based on PIMCO’s economic forecasts and active investment process decisions, and will not normally exceed one year,” it says. One potential benefit of the ETF is “potential yield premium and total return advantage over typical money market funds, as MINT can own longer maturity bonds and a broader universe of investment-grade fixed income securities.”

PIMCO Enhanced Short Maturity Strategy has an expense ratio of 0.35% and an SEC 30-day yield of 1.35%.

PIMCO Enhanced Short Maturity Strategy

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.

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