Money Market Reform May Shift Cash To Short-Duration ETFs

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

Potential money market fund reforms could deter investors, triggering consolidation in the money market, and push others to alternative options, like short-duration bond exchange traded funds.

According to a Moody's Investors Service, we will likely witness a "reshaping of the industry," with providers forced to consolidate or exit the business, reports Joe Morris for Ignites.

"Any shift from the [constant net asset value] fund's ability to deliver its 'all-in-one' benefits will result in funds moving to a proliferation of products with differing risk characteristics to meet the multiple needs of the liquidity investor," the Moody's report said. "These products will include bank deposits, separately managed accounts, short-duration bond funds, cash-plus funds and cash exchange-traded funds."

The Securities and Exchange Commission has been working on a proposal to float the net asset value for institutional prime funds. Reform talks have gained momentum after SEC Chairman Mary Jo White took over after former-SEC Chairman Mary Schapiro's failed attempts to enact reforms last year.

"The transition from a homogeneous [constant net asset value] product will also force investors to adapt their cash allocations to align with their liquidity preferences and risk tolerance," Moody's added. "Whether MMF investors have the requisite skills to differentiate between a variety of heterogeneous investment offerings remains a question."

Moody's believes that larger providers will be better suited to utilize their scale to throw their weight around the market.

Meanwhile, fixed-income ETFs could take a piece of the $2.6 trillion money market. Specifically, Investors can take a look at short-duration bond ETFs options, including:

  • PIMCO Enhanced Short Maturity Strategy (NYSEARCA:MINT): effective duration 0.96 years; 0.57% 30-day SEC yield
  • SPDR Barclays 1-3 Month T-Bill (NYSEARCA:BIL): modified adjusted duration 0.13 years; -0.09% 30-day SEC yield
  • iShares Barclays Short Treasury Bond (NYSEARCA:SHV): effective duration 0.40 years; 0.00% 30-day SEC yield
  • Guggenheim Enhanced Short Duration Bond (NYSEARCA:GSY): average duration 0.37 years; 1.02% 30-day SEC yield

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.