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Money Market ETFs Are Hot: Here's Why

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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.

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 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 - Free Report)

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 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 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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