Money Market Debate Puts Focus On Short-Duration ETFs

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

The Investment Company Institute is staunchly against SEC reforms to float the net asset value on money markets but believes a type of "gates and fees" could pose as a better solution. In either case, short-term bond exchange traded funds stand to gain a competitive advantage.

"Let's check the count against floating NAVs," ICI President and CEO Paul Stevens said, according to ICI. "They don't address regulators' goals. They eliminate key benefits to investors. They harm the economy. They increase systemic risk. And they carry immense costs and operational complications."

"Simply put, forcing funds to float their NAVs doesn't address the problem that most preoccupies many regulators-how to avert heavy redemptions out of money market funds," Stevens added.

His concerns are also voiced by many groups, individuals, businesses, state and local governments, and nonprofit organizations that are against a changing $1.00 value of money market funds.

"Since 2009, hundreds of entities from the private and public sectors across the economy have expressed their opposition to floating NAVs and other ill-considered proposals," Stevens said. If money markets had a floating NAV, "corporate America could see a significant reduction in the supply of short-term credit," and "the pool of capital that state and local governments use for financing vital needs will shrink or dry up."

On the other hand, Stevens is in favor of implementing a type of redemption fee on money market funds during times of duress as a way to dissuade a "run on the banks" event, similar to what happened during the 2008 financial crisis.

"Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressures in periods of market turmoil," Stevens said.

Nevertheless, any changes to the status quo in the money markets would be a huge boon for the growing fixed-income ETF market, notably short-duration bond funds as a cash alternative. Ultra-short-duration bond ETFs include:

  • PIMCO Enhanced Short Maturity ETF (NYSEARCA:MINT): 0.57% 30-day SEC yield; 0.95 year effective duration.
  • Guggenheim Enhanced Short Duration Bond (NYSEARCA:GSY): 0.37 year duration; 1.11% 30-day SEC yield.
  • iShares Short Treasury Bond (NYSEARCA:SHV): effective duration 0.39 years; 0.02% 30-day SEC yield.
  • SPDR Barclays 1-3 Month T-Bill (NYSEARCA:BIL): effective duration 0.14 years; -0.09% 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.

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