Money Market Funds vs. Short-Duration Bond ETFs

December 23rd at 6:00am by Tom Lydon

Outflows from money market funds have been common due to the current low rates and talk of reform measures that could make the funds less attractive. Investors have found they can get better yields and performance with actively managed short duration bond ETFs.

“As big banks have pushed their deposit rates to near zero and other safe fixed-income investments have seen their income dwindle, investors have had to find alternatives to produce the investment income they need. Especially for retirees and others who live off their investments, getting enough cash flow is essential to meet living expenses,” Dan Caplinger wrote for The Motley Fool. [Short-Duration Bonds in Focus on Money Fund Reform Talk]

Due to the Federal Reserve’s low-rate policy and the risk-off trade, money markets are essentially yielding zero. Total assets in these funds is at $2.6 trillion, down from $3.8 trillion before the financial crisis, reports Stan Luxenberg for Global & Mail. In response, investors have flocked to the bond market, and ETFs have made investing in these tools much more streamlined. [Will ETFs Replace Money Market Funds?]

PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT) yields 1.07%. According to Morningstar data, the ETF has returned 2.36%, beating the average ultra short bond ETF by one percentage point. Some investors use the ETF as a money market fund alternative. [How PIMCO Manages Its Active ETFs]

The category also includes Guggenheim Enhanced Short Duration Bond ETF (NYSEArca: GSY. The yield is 0.47% and the fund tracks commercial paper, government and corporate bonds, high yield and municipal bonds.

“By investing in the high-yield ETF, we can pick up extra yield in an efficient way,” William Belden, Guggenheim’s head of product development said in a report.

Extra low interest rates will persist into the next year and declining yields for corporate bonds have created the possibility of a bond bubble, which could equal large losses for investors in fixed-income, reports Simon Smith for ETF Strategy. Over the next few years monetary policy is likely to stay favorable for bond investments. The timing, pace and breadth of future rate increases and inflationary pressure is the key to how the bond market will hold up going forward.

PIMCO Enhanced Short Maturity ETF

Actively Managed ETFs, ETF, Bond, Bond ETF, MINT, GSY

 

Tisha Guerrero 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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