A Money Market Fund by Any Other Name...

After Samsung invested in Amplify in 2022 I wasn’t sure if that relationship would lead to Amplify launching products in Korea or Samsung coming to America. So far it seems like Amplify has imported at least one of their US funds to Korea with the launch of the Samsung BlockChain Technologies ETF in April of 2023. Last week saw the launch of a new fund from ETF issuer Amplify, the Amplify Samsung SOFR ETF (SOF) and a couple of things about it caught my attention. The first was that the fund is co-branded with Samsung Asset Management. The second was the reference to SOFR in the fund’s name. If you’re familiar with what SOFR is and how it came to be, then feel free to skip the next section but if not, let’s take a quick trip down interest rate reference lane.

SOFR?

In 2023, the world’s financial markets switched its core reference lending rate from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR). While there have been banks and bankers in London for centuries LIBOR is said to have originated as recently as 1969. It was estimated that post-financial crisis there was about $300 trillion of debt that was priced using this rate. The rate was used to price swaps, futures, and other derivatives, and also for pricing bank loans, mortgages, corporate debt, municipal bonds, and credit card rates among other debt. If you really want to learn everything you can about this reference rate, check out this paper from the New York Fed. “Reference Rate”, or “Benchmark Rate” are slightly more fancy ways of saying “Index”, which is what LIBOR was. Like almost all of the indexes we are used to hearing about, LIBOR was a weighted average representation of the value associated with a transaction, just like the price of equity trades flow from the exchange to an index provider like Nasdaq and are used to print the new level of an index like the Nasdaq 100. One big difference, and the one that ultimately led to the downfall of LIBOR was that the rates associated with loans that banks were using to set LIBOR were self-reported.

The long and short of it is that we all found out about a decade ago that the information firewalls that had been set up between trading desks and the rate-setting desks at various banks had deteriorated to the point where traders were effectively manipulating their banks’ LIBOR rate submission in order to boost the value of their positions. The result of this debacle was the conviction of a handful of traders, massive fines for a number of banks, and the introduction of various regulatory frameworks like IOSCO’s Principles for Financial Benchmarks and the adoption of Benchmark Regulation to establish enforceable rules around the development, calculation, and dissemination of financial benchmarks. What it also led to was the creation of a new benchmark that not only presented a similar rate but did so using prices that could be traced back to verifiable transactions. In this case, the market they turned to was the overnight repurchase (Repo) market. That decade-old $300 trillion estimate for LIBOR now sits at about $400 trillion for SOFR. Okay, back to the fund.

SOF

It’s interesting to me that Amplify didn’t structure this fund as a Money Market Fund (MMF). I think that has to do with not wanting to deal with the intricacies of Rule 2a-7, which governs MMFs. In reviewing the holdings of the fund, I expected to see the usual mix of short-, and mid-term treasuries and maybe some high-grade commercial paper. What I saw were investments in the next three calendar days of Repos which, I must admit took me back to my fund accounting days, when we would sweep cash out of all our clients’ mutual funds and put it in a Repo for the night or weekend. It might not sound like a big difference, and to some, it isn’t but for 20 basis points (0.20%) investors are essentially getting a money market fund that has even less interest rate sensitivity (duration) than the very low 0.10 years of a fund like Global X’s 1-3 Month T-Bill ETF (CLIP). In reviewing SOF’s summary prospectus the fund looks to invest directly in Repos but also can achieve SOFR exposure through OTC swap agreements. As an aside, it used to be that an issuer wanting to hold some exotic asset in their fund had to do some fancy legal and accounting footwork by setting up an offshore entity and holding shares of that entity in the fund. Nowadays, a straightforward swap seems to make everyone’s lives easier to get those exposures.

If what you’re looking for is to take advantage of the current high-interest rate environment, my take is that it’s pretty hard to get as pure an exposure to the global reference rate as you can get with SOF. It’s certainly a more enriching experience than whatever savings rate your bank is offering.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.