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.