There Is No Such Thing As A Money Market ETF
As regular readers may know, I monitor my web statistics like a hawk. Not because doing so is particularly useful, of course, but rather because it’s surprisingly addictive. Occasionally, I’ll notice a trend, a search query, or something else that catches my attention; often the result of a misunderstanding in how certain investment vehicles work. Lately, I’ve been getting a lot (relatively) of queries centering around money market ETFs. Well, there is no such thing as a Money Market ETF, and here’s why.
Can’t Break The Buck
The defining characteristic of, and primary reason for investing in, a money market fund is that the net asset value (NAV) never fluctuates from $1. To “break the buck” is a monumental sin in money market land. Indeed, if an investor isn’t absolutely assured of being able to sell a share for exactly what she paid for it, there would be not point in ever owning one. One could simply open an FDIC-insured high yield savings account (such as ING Direct or Discover bank) instead.
By virtue of its structure, an ETF can obviously never guarantee the value of its NAV in any given day. Thus, anything passed off as a “money market ETF” on the ‘net (SHY is often cited) is really just a short-term bond fund. With an average duration of just under 2 years, SHY is definitely a conservative choice. Still, it’s far more than the ultra-short average duration of the average investment of most money market funds (which rarely exceed 60 days). In an asset class when even minuscule deviations in NAV are undesirable, an ETF capable of using 1-2% in less than a month (if rates shoot up suddenly) is not acceptable.
What Are Money Markets Good For, Anyway?
Money market funds, along with other cash equivalents, are great savings vehicles. For example, your emergency fund should be primarily invested in liquid investment vehicles where safety of principal is absolutely assured. Money market funds are perfect for this. They don’t make great long-term investments, however. For the price of just a slight amount of price volatility, short-term bonds can bring significantly higher returns at lower costs. And with low-return investments, every little bit counts.
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Interesting post. Here in Canada, we have one product that is marketed as a money market ETF:
Claymore Premium Money Market ETF
http://www.claymoreinvestments.ca/en/etf/fund/cmr
The duration of the holdings is mostly less than 90 days, and the target NAV is $50 per share.
I would agree that it this type of product makes little sense when you can mark cash in a high-interest savings account.
Interesting. I don’t think technically I would consider this a money market etf because both the price and NAV fluctuate. I would consider it more an ultra-short term bond fund. I suppose Canadian and U.S. regulatory agencies have slightly different definitions of what constitutes a money market fund. Either that or the rules don’t apply to ETFs.