Money Market ETFs: Yes, they’re a Thing Now, But Read this First Before Buying

Managing cash has never been easier, thanks to the rise of ETFs. If your goal is to keep your principal safe while earning a little on the side, you’ve already had solid options like Treasury bill ETFs or ultra-short-term bond ETFs. Both come with low credit risk, monthly distributions, and yields tied to prevailing short-term interest rates.

Now, there’s a new player on the block: money market ETFs. The Texas Capital Government Money Market ETF (MMKT) debuted on September 24, 2024, and brings the simplicity of money market investing into an ETF structure. As of December 19, it boasts a 4.49% seven-day SEC yield with a reasonable 0.2% expense ratio.

But before you invest, it’s important to understand that money market ETFs don’t function quite the same way as the money market mutual funds you might already know. The ETF structure adds some quirks that could catch you off guard. Here’s what you need to know before making the leap.

What Makes MMKT Different?

The defining feature of a money market mutual fund is its fixed net asset value (NAV) of $1. No matter when you redeem or buy shares—whether today or tomorrow—you always transact at $1 per share, based on the fund's end-of-day NAV.

Barring extreme scenarios like "breaking the buck," money market mutual funds almost never see their NAV dip below $1. Instances of breaking the buck are rare and typically occur during once-in-a-lifetime credit or liquidity crises, such as the 2008 financial meltdown.

The benefits are straightforward: zero volatility in your investment, highly liquid capital, and a level of safety comparable to certificates of deposit (CDs) or high-yield savings accounts (HYSAs).

MMKT, however, is a different story. As an ETF, it doesn’t have a fixed NAV of $1 and trades throughout the day on an exchange. That distinction introduces some nuances you won’t experience with a money market mutual fund.

Take a look at the chart for MMKT, and you’ll notice a sawtooth pattern. Over the course of the month, its NAV steadily creeps upward until the ex-distribution date, when it drops by the amount of the monthly payout. Then the cycle begins again.

This means you could, in theory, experience an unrealized loss with MMKT. For example, if you buy shares just before the ex-distribution date—when the NAV is at its peak—you’ll see a drop in value that might take time to recoup, depending on when you sell.

Additionally, there’s the matter of the bid-ask spread. Unlike money market mutual funds, which settle at $1 at the end of the day, MMKT’s price can fluctuate slightly. As of now, the bid is $100.46, and the ask is $100.47—a small gap, but one to keep in mind, especially if you’re planning to trade frequently.

Who Should Use Money Market ETFs?

In my view, money market ETFs like MMKT sit squarely between Treasury bill ETFs and ultra-short-term bond ETFs on the risk-return scale. They offer a middle ground: very low risk with slightly more flexibility than a traditional money market mutual fund.

MMKT is about as safe as it gets for an ETF. To be classified as a "government" money market fund, at least 99.5% of its total assets must consist of cash, U.S. government securities (both fixed and variable rate), or repurchase agreements backed by U.S. government securities or cash. This strict asset requirement ensures a high degree of liquidity and stability.

Despite being an ETF, MMKT also complies fully with SEC regulations for money market funds, most notably Rule 2a-7 under the Investment Company Act of 1940. This rule imposes stringent guidelines on money market funds, including restrictions on credit quality, maturity, and diversification.

It limits the weighted average maturity of a fund’s portfolio to 60 days or less and requires daily and weekly liquidity thresholds to ensure funds can meet redemption requests. For investors, this means MMKT maintains the same regulatory safeguards as a traditional money market mutual fund.

That said, there’s one notable risk to keep in mind: fund closure. MMKT currently manages $47 million in assets, which is under the $50 million "death zone" threshold for ETFs.

This term refers to the point where funds may not generate enough revenue through management fees to remain viable. While this isn’t a pressing concern right now, smaller ETFs often face challenges in attracting new investors, particularly in niche categories.