Investors are awash in cash — $6.6 trillion, to be exact. That is a record amount, and with such a huge amount of cash in their portfolios, investors continue to look for options on what to do with all that cash. With that in mind, Wall Street has launched various funds and ETFs to help investors manage their liquidity.
But, until recently, none of these options have been a “true” money market fund.
That has changed with the recent launches and announcements from several issuers, which have brought the safety of money market funds to the world of active ETFs. These new funds offer intraday liquidity, stability, and additional advantages for investors.
Money Market Funds Defined
By definition, money market funds — distinct from money market bank accounts — invest in very short-term securities with maturities as short as overnight, including Treasury bills, commercial paper, banker’s acceptances, repurchase agreements, municipal on-demand notes and certificates of deposit (CDs). These funds have long served as a source of liquidity/savings for portfolios and are designed to maintain a stable $1 per share price.
However, during the Great Recession, several funds “broke the buck,” leading the SEC to include new rules known as code 2a-7. It includes new classifications, investment restrictions and liquidity gates or fees for certain withdrawals.
Today, there are three categories of money market funds.
- Government funds are required to hold U.S. Treasury securities and CDs.
- Municipal funds hold debt issued by states, towns and other local government entities.
- Prime Funds invest in all of the above and commercial paper, corporate notes, reports and other short-term private instruments from domestic and foreign issuers.
Prime funds have received the most scrutiny from the SEC as they provide the most risk amid the banner of safety. It was the Reserve Primary Fund, a prime money market fund that broke the buck in September 2008, triggering careful consideration of changing the rules to prevent such events in the future.
A ‘True’ Money Market ETF
Within the new rule’s framework, Wall Street has turned to active ETFs to launch cash-like products to provide investors with liquidity and the higher yields they crave. Funds like the iShares Ultra Short-Term Bond ETF (ICSH) or SPDR Ultra Short-Term Bond ETF (ULST) are essentially prime market funds. These cash-like funds hold various commercial paper and other “prime” assets.
The problem is that these funds still carry risks. During the COVID-19 pandemic and other economic crises, liquidity was still there. The largest cash-like ETFs functioned just fine during the pandemic, providing ample liquidity for their shareholders. However, the issue was that the market price of the ETF and the underlying NAV still dropped.
But that may change. ‘True’ money market ETFs are the ones that will adhere to the SEC’s Rule 2a-7, which limits what a money market fund can invest in.
Back in September 2024, bank Texas Capital launched the world’s first so-called 2a-7 ETF, the Texas Capital Government Money Market ETF (MMKT). More recently in November 2024, the Financial Times reported that ETF titan BlackRock submitted SEC filings to launch two 2a-7 compliant ETFs, namely the iShares Prime Money Market and iShares Government Money Market ETF.
iShares and Texas Capital’s money market funds will invest in cash, U.S. Treasury bills, and government-backed repurchase agreements. The iShares prime fund will own government securities as well as short-term commercial and bank instruments. Money market funds are required to hold at least 25% of their total assets in daily liquid assets and at least 50% of their total assets in weekly liquid assets.
Big Wins for These Active ETFs
So, why launch 2a-7 compliant active ETFs when there are already plenty of cash-like ETFs on the exchanges?
For one thing, lower costs. Money market funds are surprisingly expensive to operate and take a lot of handholding. After all, when securities mature in as little as overnight, you need staff who can make trades, move cash, and conduct research quickly. This leads to higher-than-expected expense ratios.
Those higher-than-expected expense ratios can eat into yields when interest rates are low. In fact, in the previous era of ZIRP, many money market funds paid no dividends at all and had to waive some of their expenses. However, ETFs are naturally cheaper to operate. For investors, this could lead to higher yields than other structures during periods of low interest rates.
Second, liquidity could be better, particularly for institutional clients. Moving millions of dollars out of a money market fund isn’t as easy as it sounds. The SEC rule changes allow asset managers to propose withdrawal gates if there are liquidity stampedes. However, thanks to the creation-redemption mechanism of ETFs, liquidity happens in the secondary market for most participants, even large institutional investors. This allows for enhanced liquidity without gatekeeping.
Finally, the issue of a floating NAV could be minimized with these funds. While they can’t promise a stable $1 NAV, these new money market funds should provide much less volatility than some of their rival funds, which use a mix of assets to create cash-like properties. That could help put investors at ease, particularly during times of crisis.
Actively Managed Cash-Like & Short-Term Bond ETFs
These active ETFs were selected based on their low-cost exposure to cash and cash-like bonds. They are sorted by their YTD total return, which ranges from 1.5% to 3%. They have expense ratios between 0.08% and 0.51% and assets under management between $590M and $23B. They are currently yielding between 4.8% and 5.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| MINT | PIMCO Enhanced Short Maturity Active ETF | $11B | 3% | 5.5% | 0.35% | ETF | Yes |
| PULS | PGIM Ultra Short Bond ETF | $6.29B | 3% | 5.7% | 0.15% | ETF | Yes |
| JPST | JPMorgan Ultra-Short Income ETF | $22.6B | 2.7% | 5.3% | 0.18% | ETF | Yes |
| ICSH | BlackRock Ultra Short-Term Bond ETF | $5.83B | 2.5% | 5.4% | 0.08% | ETF | Yes |
| ULST | SPDR SSGA Ultra Short Term Bond ETF | $591M | 2.3% | 5.2% | 0.20% | ETF | Yes |
| LDUR | PIMCO Enhanced Low Duration Active ETF | $902M | 1.8% | 4.8% | 0.51% | ETF | Yes |
| NEAR | BlackRock Short Duration Bond ETF | $2.96B | 1.5% | 4.9% | 0.25% | ETF | Yes |
At the end of the day, these new money market ETFs could be a boon for portfolios and investors looking to add cash to their portfolios. By using these funds, investors can enjoy enhanced liquidity, potentially higher yields, and less NAV fluctuation. Additionally, the SEC’s 2a-7 framework provides peace of mind for investors on the conservative side. Given the nearly $7 trillion in cash sitting in money market funds, these active ETFs could prove to be big winners and prompt more asset managers to launch similar funds.
Bottom Line
Money market funds have traditionally been a staple of liquidity management for portfolios. And now as the SEC continues to change regulations and impose new restrictions, money market ETFs are coming to the market. With potentially lower costs and improved liquidity, these products could be attractive options for investors both big and small.
