The second quarter of fiscal 2012 marked great uncertainty for
equity markets worldwide. After posting double digit gains for the
first quarter of fiscal 2012, the markets were unable to extend
their streak further into the year.
Sluggish economic data from the domestic U.S. front and lack of
proactive measures to resolve the euro zone debt crisis were the
major contributors behind the slump, and these issues look to
plague the market going forward this year as well (read
Spanish Bailout: Did It Help European ETFs?
After two consecutive quarters of above average earnings
seasons, corporate America is most likely going to post a
disappointing picture this time around, given the sluggish global
demand and slowdown in global economic conditions. An appreciating
U.S. Dollar is also likely to impact revenues; especially for the
export oriented sectors of Technology, Materials, and Industrials
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This is of concern given the fact that companies from these
sectors generate a bulk of the revenues from outside the U.S. Any
sluggish global demand for the products globally will also hurt
These factors increase the possibility of another round of QE3
significantly, although the domestic U.S. economic condition is not
as bad as other developed economies. However, the ultra low
interest rate policy of the Federal Reserve (Fed) seems to be
running out of steam as anything significant is yet to occur.
Thankfully, the Consumer Price Index (CPI) number for the U.S.
economy stands at depressed levels of around 1.70% for the month of
May 2012. This is well in alignment with the Fed's inflation
targets of 2%. It rules out any necessity for a tighter monetary
policy leading to rate hikes which would increase long term
From an investment point of view, bond investors are having a
tough time choosing between stability, income and capital
protection because the interest rates presently stand at depressed
Floating Rate Bond ETF Investing 101
). The indication is that further investment in them would result
in capital loss once interest rates start rising. This is
especially true for longer dated securities with greater duration
levels are more sensitive to interest rate movement.
Therefore, at a time like this, is important to lay emphasis on
asset allocation for bond investors. Exchange Traded Funds are the
ultimate tools for portfolio management as they provide a holistic
exposure in a particular index, asset class or economy.
Money market ETFs provide an opportunity as a cash alternative
investment. These ETFs target the immediate end of the yield curve
which results in the ETFs having lower durations (i.e. lower
sensitivity to interest rate movements) and lower residual
maturity. These attributes of the ETFs make them a safe haven
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However, the flip side also holds true. The upside potential for
these funds are also significantly reduced compared to long term
bond ETFs. Also, the money market securities currently sport a
paltry yield which makes them poor destinations for investors
seeking current income (read
Real Return ETF Investing 101
Still, thanks to the extreme safety in funds targeting this
corner of the market as well as the relatively low fees associated
with many products in the space, any of the money market ETFs could
make for interesting safe haven choices as a way to park cash in
this troubling time.
For investors seeking exposure to money market ETFs as a spot to
stash cash during the tumultuous market, we have highlighted some
of the options in the short-duration space which could make for
interesting, and very liquid, alternatives to traditional money
market fund investments:
iShares Barclays Short Treasury Bond ETF (
Launched in January of 2007, SHV is the biggest and cheapest
product in the 'money market' ETF space. It tracks the
Barclays Capital U.S. Short Treasury Bond Index
which measures the performance of short term Treasuries. The ETF
targets the shorter end of the treasury yield curve and is pretty
much immune to interest rate risk as it has an effective duration
of just 0.40 years (see Looking
for Safety? Try These Money Market ETFs
This means that if the interest rates increase by 1%, the value
of the investments in SHV would only go down by 0.40%. However, the
weighted average coupon is just a mere 0.94% which is lower than
most bond funds out there.
At an expense ratio of just 15 basis points, the ETF is one of
the most cost effective products in the space. SHV has witnessed a
huge inflow in its asset base of late which presently stands at a
The ETF has an average daily volume of 265,736 shares. Presently
it holds 17 Treasury bonds having a residual maturity from a month
to a year.
The product sports a paltry 30-day SEC yield of just 3 basis
points. However, it is an appropriate choice for investors seeking
cash alternative investments coupled with stability in terms of
The ETF is a safe haven investment and in volatile markets it
surely would go a long way in protection of invested capital (read
Three Muni Bond ETFs to Weather the Coming
). The ETF has pretty much been flat over the past year for
returns, despite the market turmoil.
PIMCO Enhanced Short Maturity Strategy ETF (
MINT is one of the more aggressive and actively managed products
in the money market ETF space that seeks to outperform the
performance of the broader money market. It is not linked to any
particular benchmark index but includes securities with shorter
maturities in order to gain short term exposure.
The ETF employs an active management strategy and includes
securities from different sectors like Government, mortgage,
emerging markets, municipal bonds and also other investment grade
securities. This strategy enables the ETF to differentiate itself
from its peers and provide superior upside potential.
However, in order to do this it has to somewhat compromise on
the credit quality of the securities given the fact that MINT
includes securities issued by other institutions besides the
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Despite employing an active methodology for portfolio
construction, the ETF charges a paltry 35 basis points in fees and
expenses. The ETF was launched in November of 2009 and since then
has managed to amass an asset base of $1.73 billion.
The fund also has a robust volume, coming in close to 200,000
shares in a normal day. The fund also has a well diversified
portfolio, holding over 580 securities in its basket (
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From an interest rate risk analysis perspective, an average
duration of around 1 year can be considered too high for comfort
for a 'money market' ETF, given the generic nature of these funds.
On the other hand, this provides greater scope for maximizing
returns than traditional cash alternative short term
Also, the non-government issued securities in the portfolio will
be subject to higher magnitude of credit risk. Nevertheless, the
ETF has a relatively high 12-month yield of 1.02% compared to other
money market ETFs and is a good option for investors with a
slightly higher risk appetite.
SPDR Barclays Capital 1-3 Month T-Bill ETF (
The ETF is designed to replicate the performance of U.S dollar
denominated short term Treasury securities which have a residual
maturity of 1-3 months as represented by the Barclays Capital U.S.
1-3 Month Treasury Bill Index.
From a credit risk point of view, the ETF is risk-free as it
includes only Government issued Treasury bonds. All securities in
its portfolio are basically zero-coupon, which makes the ETF
extremely low yielding.
BIL was launched in May 2007 and has $1.41 billion in total
assets. The ETF holds 9 securities in total and has a weighted
average maturity of 0.13 years. The interest rate risk is more or
less non-existent due to its short end focus of the yield curve as
indicated by this modified duration of just over one-tenth of a
However, the investments in BIL should only be considered for
safety purposes as it offers very limited upside potential, mainly
thanks to its ultra short term focus (see
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). Moreover, the premium that the investors are charged is an ultra
low 13 basis points making it a cost effective investment avenue.
The ETF has lost 10 basis points in the last one year.
Guggenheim Enhanced Short Duration Bond ETF (
GSY was launched in February of 2008 and has total assets of
$164.84 million with an average daily volume of 34,029 shares.
Although the ETF abstains from calling itself a money market ETF,
its investment theme, objective and strategy are very similar to
that of an actively managed money market ETF.
GSY employs a short duration strategy by targeting securities
with low residual maturities. The ETF does not benchmark itself to
any particular index; however it attempts to outperform the
Barclays Capital 1-3 Month U.S. Treasury Bill Index, the same index
Similar to MINT, this particular fund also invests across a
variety of short term securities issued by various institutions
including Government, Commercial Paper, Corporate Bonds, Asset
backed securities, High yield securities and municipal bonds.
This causes the ETF to allocate towards securities having low
credit ratings thereby making the ETF prone to credit risk of the
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). However, a majority of its assets are invested in high rated
securities (45.81% of its assets are rated A+ and above).
At present, the ETF holds around 83 securities with 32.93% of
its total assets allocated towards the top 10 holdings. Thanks to
the active management of the ETF, it charges investors 0.27% in the
form of annual fees and expenses (read
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).The ETF pays out a yield of 0.42% annually and has a slightly
higher average maturity of 1.40 years compared to other money
Despite this fact, the ETF does really well in maintaining an
average duration of just 0.24. Therefore, the ETF can be thought of
an investment avenue, which could be more volatile than other cash
alternative investments; however it also has a superior upside
The following table summarizes the relative position of the
discussed ETFs from the money market ETF space.
Avg. Daily Volume
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SPDR-BC 1-3M T (BIL): ETF Research Reports
GUGG-EN SH DUR (GSY): ETF Research Reports
PIMCO-E SMSF (MINT): ETF Research Reports
ISHARS-BR SH TB (SHV): ETF Research Reports
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