Money Fund Changes May Drive Interest In Short-Duration ETFs

Includes: BIL, GSY, MINT, SHV
by: Tom Lydon

With U.S. regulators taking a closer look at money market funds, fund managers are trying to take preemptive steps to thwart regulatory actions. Still, observers doubt it is enough and some investors are contemplating short-duration bond exchange traded funds as an alternative.

Wells Fargo Advantage Funds is the latest to start posting daily disclosures of its money market fund net asset values in hopes of alleviating concerns over transparency and fund risks, writs Joe Morris for Ignites.

"The market-based NAV, by marking holdings to current market prices, provides investors with an understanding of the value of a fund's investments if it were completely liquidated at current market prices," according to Wells Fargo Statement. "We expect that publishing market-based NAVs will give investors even more confidence in our commitment to maintaining a stable NAV."

Other fund managers that have implemented daily disclosures include Federated Investors, Fidelity, J.P Morgan Asset Management, BlackRock, Bank of American Funds, Dreyfus, First American, Goldman Sachs, Invesco, Reich & Tang, Charles Schwab, State Street Global Advisors and Western Asset Management.

The daily disclosures to NAV holdings are seen as a way for fund managers to appease regulators calling for floating the NAV in light of the run on the funds during the 2008 financial crisis.

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).

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates.