Are Short-Duration ETFs the ‘Heirs to Money Market Funds?’

November 30th at 6:15am by John Spence

More investors are taking a look at short-duration bond ETFs amid talk of reform measures that could take away some of the competitive advantages of money market mutual funds.

Outgoing SEC Chairwoman Mary Schapiro had fought to implement regulatory changes in the huge money fund business, which controls nearly $3 trillion in assets, after the financial crisis.

Schapiro’s replacement at the SEC, Elisse Walter, could revisit the issue of money market fund reform. [Short-Term Bond ETFs in Focus]

Schapiro over the summer backed down on money fund reform measures after she failed to garner the backing of SEC commissioners. She had urged the SEC to consider capital buffers and restrictions on investor redemptions for money market funds.

Perhaps most importantly, she proposed a floating net asset value, or NAV, for money funds, which would be a huge change. Money market funds are designed to keep a stable $1-per-share value. Some funds have “broken the buck,” although it is rare. One recent example is the Reserve Primary Fund, which broke the buck in 2008 due to losses on Lehman Brothers paper. [Will ETFs Replace Money Market Funds?]

‘Hedging their bets’

Although money market funds are yielding essentially zero in a low-rate environment, investors like the safety factor of knowing that at least they won’t lose money. However, a floating NAV for money funds would change all that.

It would also potentially boost the appeal of short-duration ETFs such as PIMCO Enhanced Short Maturity Strategy (NYSEArca: MINT), SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL), iShares Barclays Short Treasury Bond (NYSEArca: SHV) and Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY). These ETFs have a fluctuating NAV.

“The SEC ratcheted down money market fund risk. This ETF avoids much of that regulation, allowing it to earn potentially higher returns,” Morningstar says in a profile of MINT, the PIMCO fund.

Also, Charles Schwab (NYSE: SCHW) has filed to launch its own short-duration bond ETF that would be actively managed.

Schwab’s planned ETF is “the latest sign that U.S. fund managers see ETFs as the heirs to money market funds,” the Financial Times reported Thursday. “The emergence of short-term ETFs coincides with a heavy gloom gripping the money fund industry.”

Proposed reforms such as requiring the funds to abandon their stable NAV policy and building up capital reserves “are liable to cost the funds business,” the newspaper said.

“The short-term ETF forays suggest Schwab and others are hedging their bets on a money fund revival,” it added.

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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