Why Investors Are Dumping Money Market Funds For Short-Duration ETFs

July 27th at 8:00am by Tom Lydon

With the regulatory spectre looming over the money market fund industry, corporate treasurers and investors have begun shopping around for safe alternatives, like short-term bond exchange traded funds.

After the financial depression of 2008, the Securities and Exchange Commission has looked into preventative measures to keep money markets from imploding. For instance, SEC Chairman Mary Schapiro has been urging the commission to impose a floating net asset value, essentially breaking the buck on the $1-per-share value that current funds follow. [Short-Maturity ETFs Eye Money Fund Reform Gridlock]

As such, investors have looked into the low duration bond ETFs as an alternative to park their cash, according to Zacks Research. The ETF options all include bonds with maturities less than 1 year, low expense ratios and, most importantly, sport very high liquidity. [Will ETFs Replace Money Market Funds?]

The iShares Barclays Short Treasury Bond Fund ETF (NYSEArca: SHV) is the largest of the money market ETF alternatives. SHV tries to reflect the performance of the Barclays Capital U.S. Short Treasury Bond Index. With an effective duration of 0.4 years, the index is relatively immune to interest rate risks as it targets the low end of the yield curve – if interest rates rise 1%, the value of SHV would only go down 0.4%. The ETF has an 0.15% expense ratio and a 0.04% yield.

The SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSEArca: BIL) tries to reflect the performance of the Barclays Capital U.S. 1-3 month Treasury Bill Index, which includes Treasuries with a maturity of 1-3 months. Since all the underlying securities are basically zero-coupon, the ETF has a very low yield. The fund has a duration of 0.11 years, an expense ratio of 0.1345% and a 0% yield.

Investors may also consider actively managed options. For instance, the Guggenheim Enhanced Short Duration Bond ETF (NYSEArca: GSY) follows an investment objective and strategy that is similar to an actively managed money market ETF as it targets a variety of securities, such as government, commercial paper, corporate bonds, asset backed, high yield and munis, with low residual maturities. The fund tries to outperform the Barclays 1-3 Month U.S. Treasury Bill Index. GSY has a 0.24 year duration, a 0.27% expense ratio and a 0.43% 30-day SEC yield.

Lastly, the PIMCO Enhanced Short Maturity Strategy Fund ETF (NYSEArca: MINT) is an actively managed ETF that tries to outperform the broader money market through securities with short-term maturities. However, in order to generate a higher performance, the fund will include companies with lower credit qualities. The fund has a higher 1 year effective duration, a 0.35% expense ratio and a 0.98% 30-day SEC yield.

For more information on ETFs and the money market, 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.