Money Market ETFs Are Hot: Here's Why

Money market funds are brimming with assets right now. The segment has hauled in $322 billion over the past six months, marking the fastest clip of growth since the financial crisis in the second half of 2008. Total assets rose to nearly $3.5 trillion, according to data from FactSet and Bank of America Merrill Lynch (NYSE:BAC).

The money market funds have witnessed inflows every month this year barring April, with assets rising in nine of the past 10 weeks. U.S.-China trade tensions, global growth slowdown and Brexit uncertainty kept the broader market edgy in the May-August period.

Fears of a prolonged trade war have raised concerns about an already softening global economy. As a result, the bond market is sending signals of a recession in the U.S. economy. As flight-to-safety dominated global markets, the benchmark 10-year U.S. Treasury note yield slumped.

On the other hand, the Fed had enacted several rate hikes from Dec 2015 till this July. The Fed’s tightening move kept the short-term bond yields on the higher side, resulting in an inversion in some key parts of the yield curve. The 10-year yield fell below that of the one-year in May.Against this backdrop, many investors parked their money in ultra-short duration cash-like ETFs (read: 10-Year Yield Below One-Year: Play Leveraged Bond ETFs).

Why Were Ultra-Short Duration Cash-Like ETFs Favored?

Given their very low duration, these are less susceptible to rising rate worries. Analysts believe cash and short-dated fixed income may play a greater role in providing stabilization in a portfolio.

Real returns of cash alternatives have been improving. Yield on short-term Treasury bills outdoes U.S. inflation, meaning investors can now have real, inflation-adjusted return from cash for the first time in a decade, per Financial Times.

Investors should note that yield on one-month treasury note stood at 1.79% on Oct 1 compared with 1.65% 10-year benchmark treasury yields. However, with chances of the “phase 1” U.S.-China trade deal, the broader market rebounded and long-term treasury yields started rising.

Still, ultra-short-term or money market ETFs are hot bets now with promising much-higher yields and lower risks. Money market funds have benefited even after a slump in yields following Federal Reserve rate cuts in July and September. The funds are now yielding about 2%, down from 2.47% at the beginning of 2019, according to Moody’s, as quoted on CNBC (read: ETF Winners Amid Half-Hearted Response to Fed's Rate Cut).

Below we highlight a few money-market ETFs and their performance and yields.

PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (NS:MINT)

Its effective duration is 0.20 years while the 30-day SEC yield is 2.27% annually. It is flat in the past three months (see all Money Market/Ultra-Short-Term ETFs here).

iShares Ultra Short-Term Bond ETF ICSH

Its effective duration is 0.42 years while the 30-day SEC yield is 2.27% annually. It is up 0.1% in the past three months.

JPMorgan (NYSE:JPM) Ultra-Short Income ETF JPST

Its 30-day SEC yield is 2.37% while its duration is only 0.52 years. It is up 0.1% in the past three months.

SPDR SSgA Ultra Short-Term Bond ETF ULST

Its Option Adjusted Duration is 0.26 years while the 30-day SEC yield of the fund is 2.55% annually. The fund is flat in the past three months.

iShares Floating Rate Bond ETF (TSX:FLOT)

Its 30-day SEC yield is 2.45% while its duration is only 0.13 years. It is flat in the past three months.

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