This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Money-Market Funds Face an Uncertain Future

Stocks in this article: WBLNX

NEW YORK ( TheStreet) -- Money-market funds are "well-executed fictions," writes Don Phillips, Morningstar's president of fund research. The illusion centers around the fact that the funds always price their shares at $1.

As a result, investors view money-market funds as interest-bearing checking accounts that can never lose money. In fact, the funds hold portfolios of fixed-income assets that can default.

According to the Securities and Exchange Commission, there have been hundreds of instances when funds have faced losses. In nearly every case, shareholders remained untroubled by the dangers because fund companies stepped forward to make the funds whole and preserve the image of security.

Morningstar's Phillips argues that the rescue operations have served investors well. "These funds are a wonderful convenience that benefits millions of investors, few of whom would like to see the script altered in any way," he writes.

Now SEC Chairman Mary Schapiro wants to end the fiction. Under an SEC staff proposal, the price of money-market shares would no longer be fixed. Instead, shares would rise and fall along with the value of holdings in the portfolio.

Fund companies have howled in protest, saying that the new rule would cause many shareholders to dump their funds. The industry's fears are undoubtedly justified. If money-market funds can routinely fluctuate, then investors will shift to real bank checking accounts.

Republicans in Congress have vowed to block the new rules. So any changes this summer are unlikely. But if President Obama is re-elected, then the new rules could be imposed. Schapiro says floating rates are necessary to avoid a repetition of the trouble that occurred in 2008 when the Reserve Fund faced defaults and "broke the buck."

In response, institutional investors dumped their funds. The markets only calmed after the Treasury stepped forward and agreed to back up money-market funds.

No matter what Washington decides, money-market funds are likely to shrink. In recent years, investors have been dumping the funds. Total assets in the funds have fallen from $3.8 trillion in 2008 to $2.5 trillion now, according to the Investment Company Institute.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs