New ETF Taps Record Interest in Money Market Funds

Money market funds have been around since the 1970s, and ETFs since the ‘90s — but it took until last week to bring them together.

Dallas-based Texas Capital launched the Government Money Market ETF (MMKT), which will tap the $6.4 trillion money market space while providing the liquidity of ETFs — the company says it’s a first-of-its-kind approach. It’s also tapping serious interest in money market funds that added $121 billion in inflows during the week ending Sept. 25 alone, a record for total assets, according to the Investment Company Institute.

“There was a wake-up call, as people had money in checking accounts, not earning any interest at all,” Texas Capital head of corporate and investment banking Daniel Hoverman told The Daily Upside. “They realized there’s an opportunity cost for not getting into a money market fund or buying a Treasury bill.” 

Similar But Not Congruent

There are plenty of ETFs that deal in short-term government bonds and Treasury bills, but there is a slightly weedy difference when it comes to MMKT in regard to obscure Securities and Exchange Commission definitions. The fund is the first to follow Rule 2a-7 of the Investment Company Act of 1940, Hoverman said. That rule requires that after the acquisition of an asset, a money market fund must hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets:

• MMKT carries an expense ratio of 20 basis points, and it will invest 99.5% or more of its total assets in cash, government securities, or repurchase agreements with maturities of up to 13 months, according to filings with the SEC.
• However, MMKT won’t maintain a net-asset value of $1 per share like money market funds. Instead, the fund will calculate its NAV per share based on the market value of its investments.

“We’ve had clients say, ‘I would really like to buy this stock today, but I’m in a money market, and there’s an opportunity cost,’” Hoverman said.

Future of Money Markets: Most folks shudder when they hear of raising interest rates, but those hikes tend to benefit money market funds. Even though the Fed cut rates by 50 basis points on Sept. 18, Hoverman doesn’t expect the explosive growth in money market funds to slow for some time. 

“Even as rates go down toward 4%, that’s still real money relative to having that cash in an interest-bearing account,” he said. “I don’t see us cutting rates back down to zero, so deploying your money intelligently will remain important.”