Money market mutual funds are coming face-to-face with regulatory changes stemming from the 2008 credit crisis as well as the Securities and Exchange Commission’s concern that these types of cashlike investment vehicles may contribute to market instability in times of stress.
As these changes get fully implemented by mid-October—they were approved back in 2014—some say investors could begin looking for other ways to manage their cash needs, and turn to ETFs instead.
Money market mutual funds are essentially ultra-short-term bond funds that offer investors liquidity—as in quick access to their cash—and a small yield that’s typically more attractive than merely parking cash in a bank savings account.
No More ‘Constant’ Share Price
Among the changes, institutional money market funds will no longer be allowed to have a “constant” share price, but instead will have to have floating net asset values determined by market factors, according to the SEC.
As the commission put it, “With a floating NAV, institutional prime money market funds are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00.”
Money market funds will also have fees and “gates” on the redemption side to avoid what the SEC calls “investor runs.” In other words, investors could be told they can’t redeem their shares for a certain period or be faced with fees for redemptions in times of market stress.
How ETFs Can Benefit
These changes, the SEC says, are designed to mitigate systemic risk, keeping investors from running for the exits all at once in times of trouble. But to some money managers, investors who typically own these types of funds for short-term liquidity and cash needs could find the new rules unsettling.
“We do think there will be asset flow out of money market funds in anticipation of the NAV fluctuation,” said Gary Stringer, president and chief investment officer of Stringer Asset Management. According to him, at least in the short term, “with floating NAVs, money market funds will lose their key advantage, and ETFs should benefit.”
“Most of the initial outflows will come from prime money market funds, as their increased credit risk will likely lead to increased NAV fluctuations,” he added. “Any government funds with money-marketlike durations will benefit, as these assets might be looking for the least possible volatility from both credit risk and duration risk.”
There are three U.S. Treasury ETFs most likely to benefit in the short run:
- SPDR Barclays 1-3 Month T-Bill ETF (BIL): An ultra-short term ETF that invests in Treasury bills with three months or less to maturity. The $1.6 billion fund costs only 0.14% in expense ratio, or $14 per $10,000 invested. Its 30-day yield is currently 0.13%.
- iShares Short Treasury Bond ETF (SHV): Also an ultra-short-term Treasury ETF, but one that invests in debt with remaining maturity of up to 12 months—longer than BIL. The ETF offers a higher 30-day yield of about 0.31% thanks to that longer maturity. And SHV is also the largest of the three, with $3.4 billion in assets, and an expense ratio of 0.15%.
- Goldman Sachs Treasury Access 0-1 Year ETF (GBIL): A new-to-market ultra-short-term ETF that invests in a basket of Treasury securities, including T-bills, T-notes, and floating rate notes with less than one year remaining in maturity. GBIL is unique in this segment, because it’s the first ETF of its kind to offer same-day creation/redemption by having two daily NAVs—one calculated at noon and one at 4 p.m. This feature gives authorized participants the ability to create/redeem same-day, whereas other ETFs have a creation/redemption settlement process that’s usually one to three days. That’s significant for a short-term cash product because many investors who own these types of instruments are looking for quick access to cash. The fund costs 0.14% in expense ratio and has $20 million in assets under management—GBIL is just one week old.
There are also other ultra-short-term bond ETFs that are broader in exposure and built differently than BIL, SHV and GBIL, but that could also pick up some assets from money market funds. Among them, consider three actively managed, global-in-scope strategies:
- Guggenheim Enhanced Short Duration ETF (GSY): This $907 million actively managed ETF strives to outperform the Barclays Capital 1-3 Month U.S. Treasury Bill Index. The global fund invests in a variety of fixed-income instruments, including commercial paper and bank loans, for an average maturity of 1.4 years. GSY costs a net expense ratio of 0.25%, and it’s shelling out a 30-day yield of 1.13%.
- PIMCO Enhanced Short Maturity Active ETF (MINT): This $4.9 billion actively managed fund is designed to deliver higher current income than the average money market mutual fund. It does so by investing in ultra-short-term, high-quality debt that’s global in scope. MINT costs a net expense of 0.35% and is serving up 30-day yield of 1.13%.
- FlexShares Ready Access Variable Income Fund (RAVI): This $98 million actively managed ETF owns investment-grade debt issued in the U.S. and globally. The fund currently tilts toward corporate bonds, and costs a net expense ratio of 0.25%. Its 30-day yield is about 0.75%.
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“Over the long run, short-term funds that incorporate more credit risk will join government funds in benefiting from these trends,” Stringer said. “Advisors and investors will look for the best options, and if the ETFs are more competitively priced, or offer better yield—adjusting for risk—they will stand to benefit.”
Beyond the regulatory landscape, short-term bond ETFs could also benefit from investors looking to shorten their duration in anticipation of higher interest rates ahead.
So far in 2016, most of these funds have been net asset gainers. MINT, for instance, has attracted more than $835 million year-to-date, while SHV has raked in $308 million, according to FactSet data.
Contact Cinthia Murphy at [email protected]