The changing regulatory environment for money market funds is prompting some investors to consider exchange traded funds as alternatives to traditional money market vehicles, a theme that can benefit funds such as the SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL) going forward.
These funds are seen as liquid cash alternatives that would never let an investor lose money – money market funds typically maintain a net asset value or per share value of $1. These funds hold investment-grade short-term government bonds that matures between 30 and 90 days. But if rates go negative, some are concerned that a low rate environment could “break the buck.”
Since the 2008 financial crisis when the share price of one fund dipped below a dollar and triggered widespread financial panic, these money market funds now follow more stringent regulatory rules, like taking on less credit risk or holding more cash to meet redemptions.
“BIL seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index. As such, it’s among the ETFs that share the MMF objective of providing liquidity to capital through short duration high quality investments,” according to State Street Global Advisors (SSgA).
With money market funds now offering almost no yields and the potential for yields to go negative, some advisors and investors are growing less enthusiastic with the investment, especially as fund fees eat away at any remaining yield.
BIL, which has 10 holdings, has a modified adjusted duration of 0.17 years. Duration measures a bond’s sensitivity to changes in interest rates. The $1.57 billion ETF has a 30-day SEC yield of 0.62%, according to issuer data.
Same-day settlement is also increasing the allure and utility of BIL.
“The added option of same-day settlement means BIL now disseminates two NAVs. This is the result of the process we’ve put in place for same-day settlement, where APs will need to submit creation and redemption orders by 12:00 pm EST. The value of the shares submitted will be determined based on the newly added intra-day NAV, which is to be struck at 12:00 pm EST by the fund custodian based on pricing valuations from the calculation agent,” adds SSgA.
For more information on Fixed-Income ETFs, visit our Fixed-Income category.