Short-Term Bond ETFs in Focus on Money Fund Reform Talk

November 29th at 10:30am by Tom Lydon

SEC Commissioner Elisse Walter will be the next chairwoman for at least awhile and could possibly renew talks about money market reforms. Meanwhile, Schwab has filed for an actively managed short-term bond exchange traded fund that could provide a competitive alternative to low yield money market funds.

When SEC Chair Mary Schapiro first spearheaded proposals to money market reforms, such as imposing a floating net asset value, essentially breaking the buck on the $1-per-share value that current funds follow, Walter was the only commissioner to back Schapiro.

Now that President Obama has nominated Walter to succeed Schapiro, money market funds could come under pressure, again. However, investors can use low duration bond ETFs as an alternative to park their cash. [Short-Maturity ETFs Eye Money Fund Reform Gridlock]

Schwab filed with the SEC to launch the Schwab Active Short Duration Income ETF, which will hold short-term investment grade fixed-income securities issued by U.S. and foreign issuers. The fund will be lead by Linda Klingman, Managing Director and Head of Taxable Money Market Strategies.

There are also other options currently available. 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 0.42 year duration, a 0.57% expense ratio and a 0.90% 30-day SEC yield.

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. The fund has a higher 0.93 year effective duration, a 0.35% expense ratio and a 0.68% 30-day SEC yield.

“Stricter money market fund rules have artificially pushed down yields in short, high-quality debts, homogenizing money market funds,” according to Morningstar analyst Samuel Lee. “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.”

For more information on the money markets, visit our money markets category.

Max Chen contributed to this article.

Story updated to correct a statement on the credit quality of MINT holdings.

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.

Tickers

GSY MINT