More Money Market Substitutes Taking Shape

Investors have been married to their money market funds for the better part of the last two years. But a recent poll from VettaFi’s Q4 Fixed Income Symposium in October showed more market participants may finally be willing to break out of their comfort zones and redeploy those funds into riskier assets. 76% of advisors said they were looking to cut back their allocation to money market funds in the next 12 months. This is a move that has arguably been long overdue.Plenty of cash will likely remain in money market funds even after some reallocation. Short duration products still offer attractive real positive yields, so the cost of staying short is not particularly high. Even if investors start to funnel more cash into other financial assets, it may take a while to make a significant dent in the record $6 trillion of cash still parked on the sidelines. Meanwhile, short Treasury bond ETFs, floating-rate instruments and ultra-short term structured products can all offer attractive money market fund-like alternatives.Lookalikes in the ETF LandscapeFor the first time ever, we’ve witnessed a U.S.-listed ETF take on the money market moniker. The Texas Capital Government Money Market ETF MMKT, which debuted in late September, is legally structured as a money market fund but offers a slightly different spin – with a huge chunk dedicated to repo-based agreements backed by Treasury obligations. The fund actively invests in high-quality U.S. government instruments. Unlike money market mutual funds, MMKT trades intraday and charges an expense ratio of 0.20%. A liquid money market ETF might sound somewhat counterintuitive. Investors most often turn to money markets to stow away excess cash overnight. But lately, many ultra-short duration products have begun to mimic money market funds on both a risk and return basis. The iShares 0-3 Month Treasury ETF SGOV and JPMorgan Ultra-Short Income ETF JPST continue to dominate the flow charts this year – with north of $9 billion and $4 billion in net inflows each. Meanwhile, the $34 billion SPDR Bloomberg 1-3 Month T-Bill ETF BIL remains the largest and most liquid of its kind.Under-the-Radar OptionsBut more under-the-radar products exist as well. PGIM offers a suite of ultra-short duration bond funds that have all amassed inflows last month – including the PGIM Ultra Short Bond ETF PULS, the PGIM Ultra Short Municipal Bond ETF PUSH and the PGIM AAA CLO ETF PAAA. PULS has been the most popular of the three in 2024, with $2.6 billion in net inflows. The fund currently yields 5.07% and holds more than 20% of its assets in cash, corporate bonds and securitized debt. The NEOS Enhanced Income 1-3 Month T-Bill ETF CSHI uses a put-option strategy to distribute monthly income generated from investments across a handful of Treasuries. The fund, which yields 6.07%, also uses futures contracts or swaps tied to short-term Treasury bills to achieve its goal. The Invesco Ultra Short Duration ETF GSY takes an active multi-sector bond approach by offering exposure to a diverse array of investment-grade securities with an average duration of less than one year. Top holdings currently include corporate bonds issued by Mercedes-Benz and Whirlpool.Floating-Rate InstrumentsThen, there’s the WisdomTree Floating Rate Treasury Fund USFR, which was among the biggest asset gatherers in 2023 but has seen modest outflows so far this year. The $17 billion fund is designed to fluctuate with short-term rates. It is priced at a spread over 3-month Treasury bills. Other floating-rate instruments, such as CLOs and bank loans, have also seen great success – as evidenced by sturdy inflows into the Invesco Senior Loan ETF BKLN and the SPDR Blackstone Senior Loan ETF SRLN. Markets now have much more clarity on the direction the Federal Reserve is headed – a gradual but steady rate decline. Still, questions remain about just about how fast and how far they will go. But the range of potential outcomes has narrowed. The short-duration fixed income space is increasingly starting to mirror the money market itself. The risks tied to bond investing have dramatically fallen. The outlook for inflation, recent data and rate volatility have all painted a more predictable picture of the economy. Given current perceived money market risk, investors may start to dip their toes into more short-to-intermediate-term pockets of the bond market. They may also widen the scope of acceptable duration risk they’re willing to take on. In addition, beyond the more obvious candidates, money market substitutes may even be more loosely defined to include low volatility, dividend-paying or buffered products. However, these often come at a slightly higher risk premium. For more news, information, and analysis, visit VettaFi | ETFDB.