Why Money Market ETFs Haven’t Lost Popularity, Yet

Money market funds aren’t the most lucrative. So why do investors keep buying them?

The strategies continue to see massive inflows, with $20 billion flowing in last week alone, bringing total assets to about $7.4 trillion and heightening interest in money market ETFs, a small but growing adjacent niche. Issuers have been quick to hop on the bandwagon, with JPMorgan, Vanguard and Schwab all introducing their own money market ETFs, despite a lower interest-rate environment that can diminish returns for money market funds because of their focus on Treasury bills and municipal bonds. Continued interest in the products is a result of both relatively high yields despite the low rates as well as an uncertain macroeconomic environment, experts said.

“On a risk-adjusted basis, [money market funds are] still a good tradeoff because you’re getting a 4% yield with zero risk,” said Aniket Ullal, head of ETF Research at CFRA. “Over time, if rates keep falling, we should see a reversal in interest. But right now, the returns are high enough that it’s worth it for investors.”

Money Marks the Spot

Part of the interest stems from the relative safety the funds provide amid an ongoing trade war with China and other headwinds. The SEC’s current guidance on the funds, Rule 2a-7, dictates that their holdings consist of conservative investments, with an average maturity not exceeding 60 days. “They have to have a low average maturity; there’s liquidity requirements,” Ullal said. “All of those rules make money market funds a much safer investment.”

But the rule doesn’t apply to ETFs that invest in money market funds, so most of them don’t actually adhere to 2a-7. There are only five such ETFs that comply, according to Ullal, in part because of their relative newcomer status. “Issuers launching money market fund ETFs is a fairly recent phenomenon,” Ullal added. “Money market ETFs have over $5 billion in assets. That’s very small compared to what’s in traditional money market funds.”

According to the Investment Company Institute:

• Money market funds are appealing to both institutions and retail investors, who have $4.4 trillion and $3 trillion invested in the asset class, respectively.
• Government funds make up $6 trillion of the investments, while prime money market funds make up roughly $1 trillion.

Reversal of Fortunes. Ullal predicts interest in money markets will eventually reverse as interest rates continue to drop, particularly following an expected 25 basis-point cut in December. “Money market demand may stay strong into next year,” he added. “It’ll probably take a few more rate cuts for investors to slowly move out of them.”