ETFs Capitalize on Money Funds’ Uncertain Outlook

March 27th at 7:00am by Tom Lydon

In anticipation of new regulations that could potentially diminish the returns and liquidity in money market funds, exchange traded fund providers are already filing with the Securities and Exchange Commission to provide an ETF alternative to mop up demand.

Federated, Legg Mason and iShares have filed to launch ultra-short ETFs as an alternative for investors to diversify cash holdings from money funds, reports Jackie Noblett for Ignites. The funds will try to provide money managers with a safe, short-term cash allocation, with yields slightly higher than those of money funds. [Money Market Rules May Boost Short-Duration ETFs]

“The biggest reason for these funds to come out is regulatory arbitrage,” Morningstar ETF analyst Samuel Lee said in the article. “The government has regulated money market mutual funds much more harshly and so that really restricts the return opportunities they can offer. The money market fund model is very unappealing to the end investor and also the provider,” especially because of fee waivers. [Money Market Funds Face Uncertainty]

For now, investors may look at the success of the largest actively managed ETF, the PIMCO Enhanced Short Maturity Strategy Fund ETF (NYSEArca: MINT), which has gathered almost $1.5 billion in assets. MINT has en expense ratio of 0.35% and a 12-month yield of 0.97%.

Additionally, the actively managed Guggenheim Enhanced Ultra-Short Bond ETF (NYSEArca: GSY) attracted $135 million in inflows over February. GSY has an expense ratio of 0.27% and a 12-month yield of 0.31%.

According to a McKinsey & Co. report, the money market fund business is “particularly exposed” to the growth in active ETFs, especially after the financial crisis where stable NAV was not guaranteed. However, the firm added that commissions would have to be low or zero for the ETF products to effectively compete with money funds.

“This realization has opened a window of opportunity for variable NAV products with risk profiles similar to money market funds, but significantly lower expense ratios and higher investment yields,” the report noted.

“The main issue here is that many investors in money market funds think they are risk free, but every fund has a risk and return profile. Given the returns [in money market funds], is it appropriate given the risks you’re taking?” Jerome Schneider, executive VP and portfolio manager of MINT, said in the article. “Ultimately the judge and jury in this case will be individuals and institutions, which will have to determine for themselves what the appropriate risk, return and liquidity needs are.”

PIMCO Enhanced Short Maturity Strategy Fund ETF

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.

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