Money-Market-Like ETFs Cash In

August 23, 2017

Joe BarratoInstitutional investors are reportedly turning toward ETFs, particularly ultra-short-term bond funds, as their choice du jour to equitize massive amounts of cash. Think funds like the $7.3 billion PIMCO Enhanced Short Maturity Active ETF (MINT), the$2.6 billion iShares Short Maturity Bond ETF (NEAR) and the newcomer Arrow Reserve Capital Management ETF (ARCM), with $50 million in assets. Together they have attracted more than $2 billion in combined new assets in 2017. Meanwhile, money market mutual funds have faced net redemptions this year. Joe Barrato, CEO of Arrow Funds, talks about the space and why these ETFs are winning the race.


(The chart plots the year-to-date performance of MINT and NEAR relative to the iShares Core U.S. Aggregate Bond ETF (AGG). StockCharts had not enough data on ARCM because it’s recently launched.) Chart courtesy of Is the challenge of generating income getting harder? Are ETFs changing the way investors solve for that?

Joe Barrato: From a big-picture perspective, we're entering a period where interest rates are going to rise, and in a rising rate environment, what tends to lag are things like long-term and intermediate-term Treasuries, compared to things like munis and aggregate bond index. Things with higher yield tend to do very well, like high-yield bonds, REITs, sovereign debt from overseas.

There's a gamut of products in the ETF realm investors can use. For example, higher-yielding ETFs like high-yield bonds and preferred stock funds are delivering in the 5-6% range. In the 4-5% range, you've got energy and limited partnership products; you've got global real estate. At the other end, you've got your standard equity instruments, the large growth, the large blend, going from 0-2% in yield, and then the short-term bonds.

As a firm, we approach it two ways. We have a very-high-volatility approach in a portfolio that’s 60% equities and 40% bonds, which is the Arrow Dow Jones Global Yield ETF (GYLD). And we have the Arrow Reserve Capital Management ETF (ARCM), which is all about what you’re doing with your cash. It’s a reserve cash management strategy that delivers consistent yield with the same amount of volatility as a money market fund, but with a much higher Sharpe ratio.

But the bottom line is that ETFs are viable solutions that, in this segment, weren’t available 10 years ago.


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