In a recent research note, Fitch Ratings, a leading credit rating agency, highlighted the growing popularity of short-term fixed income ETFs that market themselves as close alternatives to money market funds.
Popular short-term fixed income ETFs, such as the hugely successful Pimco Enhanced Short Maturity Strategy ETF (MINT), offer higher yield but add risk, says Fitch.
One example that epitomises the growing popularity of this type of product is the Pimco Enhanced Short Maturity Strategy ETF (MINT). The objective of MINT is to achieve the maximum current income consistent with preservation of capital and daily liquidity, identical to that of MMFs.
The fund has reached $1.5 billion in the two and half years since its inception in November 2009. MINT currently offers a 0.96% 30-day yield versus an average 0.03% yield delivered by taxable MMFs, according to iMoneyNet, a provider of money-market information and analysis. That’s a sizable difference, and one that underscores the allure for investors in traditional MMFs.
Investors also benefit from additional transparency with actively managed ETFs, as they are obligated under Securities and Exchange Commission rules to disclose their portfolio holdings daily versus monthly for MMFs.
However, while the additional yield could attract investors that target certain and specific expected return with their cash investments, Fitch believes the attendant risks of these vehicles should be understood, thoroughly analysed, and not be confused with conservatively managed MMFs.
Fitch stresses that the higher yields from these alternative short-term cash management vehicles entail additional credit, interest rate, and liquidity risks that must be considered by investors.
Their analysis of Pimco’s MINT holdings (as of 4 April, 2012) showed close to 30% of the fund’s assets invested in securities that would not be eligible for MMF holdings, including some investments in “junk” rated securities (0.61% of the fund’s assets).
Furthermore, the fund duration of close to one year implies that this fund assumes significantly higher interest rate risk relative to an average Fitch-rated prime MMF, whose weighted average maturity (WAM) stood at 38 days (0.1 year) at the end of February 2012.
Additionally, Fitch notes that ETF investors are highly dependent on secondary market activities for their liquidity, which could be constrained during times of market stress and when investors may need their cash the most. A reliance on secondary market liquidity for these “near-cash” investments may prove too volatile relative to some investor expectations and risk appetites.