Rex Nutting, for MarketWatch, argues that money market funds act like a “shadow bank,” or are part of the non-bank financial intermediaries that provide services similar to traditional commercial banks, except without the regulatory scrutiny.
Money market funds are a key component in the financial system, providing credit to many companies, financial institutions and government agencies. However, they are highly leveraged. For instance, a bank with a 20-to-1 leverage ratio, has a 5% cushion for investors who want to pull money out, but many money market funds act with a leverage of 200-to-1, or a 0.5% cushion, Nutting said.
In light of the increased regulatory scrutiny and risks associated with another run on money market funds, investors are taking a closer look at short-duration bond 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). [SEC Money Market Fund Reform Drives Interest in Short-Term Bond ETFs]
For more information on the money markets, visit our money markets category.
Max Chen contributed to this article.