GSY Invesco Ultra Short Duration ETF

After the turmoil of 2008, money market investing was never the same for many investors. Thanks to the collapse of Lehman Bros., several of these ultra-short term, and perceived to be ultra-safe, funds ‘broke the buck’ and fell below the key $1.00/share level. This situation threw markets into turmoil, causing a mass exodus from these types of securities and freezing up short-term commercial paper markets before the Treasury stepped in to guarantee some of the assets in the space.

Now, several years later, the SEC appears determined to prevent a similar situation from happening in the nearly $2.7 trillion money market. In order to do this, several officials in the key regulatory agency have proposed new rules which could create huge changes for the space. First, the SEC looks to possibly scrap the fixed $1 NAV and make these funds float like other mutual funds. Furthermore, the organization also looks to make huge alterations to those who are looking to cash out of these products. In the plan, investors would ‘be able to get only about 95% of their money back immediately, with the remaining 5% returned to them after 30 days”, wrote Andrew Ackerman and Kristen Grind in the WSJ. Obviously, for investors who use these products as cheap and liquid ways to stash cash in between trades, this is likely to be a deal breaker (read Do You Need A Floating Rate Bond ETF?).

The enormous industry looks to heavily fight the proposed changes as it could spur more outflows from the space. After all, in light of some funds breaking the buck and ultra low interest rates, many investors were already reconsidering their plans to keep cash in the space. Assets have already fallen by about a trillion dollars since 2008 while the number of funds has slumped by about 125 in a similar time period, suggesting that the last thing the industry needs is new rules that investors don’t like.

Nevertheless, it should be noted that several other SEC commissioners have expressed reservations about the idea, implying that the plan may not go through or could be watered down before it becomes law.  However, for investors concerned about the possibility of these issues, many might be better off purchasing an ETF for their ultra-short term holdings instead. These products look to provide a great deal of safety while at the same time holding many different securities which could reduce overall risk (read The Best Bond ETF You Have Never Heard Of).

Although, investors should remember that these ETFs do not carry the same check-writing capabilities or promise of stability that many of their money market fund counterparts advertise. Instead, investors may want to consider these products as a low-risk and highly liquid alternative to money market funds should new regulations come down the pike from the SEC. While you may not be able to write checks with these ETFs, investors will not be hit by the liquidity issues and can continue to move in and out of these products unabated.  While there are a number of funds that utilize ultra-short duration tactics, investors would probably be best served by taking a closer look at either one of the following two ETFs as a money market replacement:

PIMCO Enhanced Short Maturity Strategy Fund (MINT)

For the most popular product in the short-duration space, PIMCO’s MINT remains the gold standard. The product has just over $1.5 billion in AUM and trades close to 190,000 shares a day, suggesting tight bid ask spreads for virtually any investor. Investors should note that the product is active so holdings can change very quickly although a current reading suggests high weightings towards securities that mature within a year and investment grade corporates. The product has a 30 Day SEC Yield of 1.35% and it has been pretty much flat over its existence; the best three month period saw a gain of 0.8% while the worst three month period saw a loss of just 0.6% (read Ten Best New ETFs Of 2011).

Guggenheim Enhanced Short Duration Bond ETF (GSY)

For another active way to play the short-duration market, investors also have the option of GSY as well. The fund isn’t nearly as liquid as MINT but it does still have a respectable trading volume and it does cost investors less a year in fees at 27 basis points compared to 35 for MINT. The fund looks to outperform a short-term Treasury bond metric, giving GSY a focus on capital preservation. Close to 60% of the fund is in extremely short term Treasury bills—currently less than one week until maturity for all of these securities—while the remainder is spread across a variety of soon-to-be maturating corporate bonds from a number of sectors. Much like MINT, GSY has been very stable over its lifetime, as the product has seen only a 60 basis point increase in the best quarter, and a 25 basis point slump during its worst three month period, suggesting that it has done a pretty good job of completing its goal of preserving investors’ capital over the long haul (read Italian Bond ETFs: High Risk, High Reward).

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