During the subprime fiasco, many exchange traded fund (ETF) investors have sought safety by moving their holdings into money-market funds and U.S. Treasury bonds. In fact, investors poured $49 billion into these funds in just one week recently, according to the Investment Company Institute.
However, money-market funds might not be as safe as most investors think. Some of the largest money-market funds today are putting some of their cash into questionable debt investments: collateralized debt obligations (CDOs) backed by subprime mortgage loans. U.S. money-market funds run by Bank of America (BAC), Credit Suisse (CS), Fidelity Investments and Morgan Stanley (MS) had more than $6 billion of CDOs with subprime debt in June, according to fund managers and filings with the SEC, reports David Evans for Bloomberg News.
As a sign of money-market funds’ stability and safety, they were designed so that their share prices never rise above or fall below a $1 for each dollar invested. Only once have the share prices in a money-market fund fallen below a $1 to 96 cents, and that was in 1994. The fund was liquidated. So although money-market funds have much risker components than most investors previously realized, most experts agree it is unlikely that they will dip below $1.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.