Ever since money market funds got pulled into the craziness of
the 2008 market meltdown, money funds have been living under a
cloud of regulatory uncertainty and ongoing questions about whether
they can weather another crisis.
Unsurprisingly, the ETF industry has been relatively quick to
respond to what it clearly sees as an opportunity.
To take full measure of this trend, a bit of background is in
Last week, Securities and Exchange Commission Chairman Mary
Schapiro canceled a vote surrounding proposals to significantly
reform money market funds. The battle centers on whether enough has
been done to protect money market fund investors.
Unlike regular mutual funds and ETFs, money market funds have a
fixed net asset value (
) of $1 that doesn't change from day to day.
On the upside, investors know-at least the thinking goes-that
they can enter and exit at will, all the while preserving principal
and collecting prevailing short-term yields in the process.
On the downside, money market funds give up a lot of
flexibility, with strict limits on both the duration and credit
quality of the debt issues that the funds can hold.
Back in 2008, the money market industry went into full-blown
crisis when the Reserve Primary Fund "broke the buck" following the
Lehman Brothers bankruptcy.
"Breaking the buck" refers to a money market fund's NAV falling
In the ensuing panic following the Reserve Primary Fund's
breaking of the buck, investors rushed to withdraw funds to
preserve their capital, which led to a liquidity crunch that led to
a devastating freeze of private short-term lending markets.
To return to the present day, all the hoopla surrounding money
market funds got me thinking about the options investors have
within the world of ETFs and how money-market-fundlike ETFs compare
to actual money market funds.
After all, the likes of Legg Mason and BlackRock must have good
reason to enter the short-dated fixed-income ETF arena, where the
$1.9 billion Pimco Enhanced Short Maturity Strategy Fund
(NYSEArca:MINT) has so far reigned supreme since its launch in
The main differences between money market funds and ETFs that
seek to play the same role in investors' portfolios stem from the
flexibility that money market funds give up in order to offer a
fixed NAV that attracts investors.
In the end, eschewing that fixed-NAV mechanism serves as MINT's
By floating its NAV and falling in line with other mutual funds,
funds like MINT have significantly more leeway with respect to
allowed holdings and are able to dial up or dial down credit and
interest rate exposure as seen fit.
While any fund literature on money market products will
explicitly state that the funds aren't in any way insured and can
lose principal, the implicit expectation many investors have had is
that loss of principal can't or won't happen.
Well, it can happen and it did happen, and the takeaway isn't to
panic or cry foul, but to recognize that in times of great
distress, even the safest, super-short-term debt instruments have
It's best not to forget that.
Real Risks And Better Yields
In that sense, MINT's structure serves as a constant reminder to
its investors that its holdings are neither static nor risk
The floating NAV of MINT and the similarly designed ETFs that
will soon come to market-while reducing the ability to know with
certainty that 100 percent of invested capital will be
preserved-should reflect the current market perception of the value
of the fund's holdings.
But crucially, it also allows for the opportunity in today's
zero-interest-rate environment to actually earn some yield in an
ultra-short duration fund.
The question comes down to how sure you need to be about getting
If it's of paramount importance to you, then money market funds
are still the safer bet. But if you're willing to handle a bit more
uncertainty, MINT and its soon-to-be-launched competitors are worth
a closer look.
At the time the article was written, the author had no positions
in the securities mentioned. Contact Gene Koyfman at
email@example.com. Follow Gene on Twiiter
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