NEW YORK (
) - Assets have flowed out of money market funds this year, as investors seek higher-yielding securities.
With the seven-day yield on taxable money market funds holding steady at a record low of 0.03%, investors are seeking alternatives in both the exchange-trade fund and mutual-fund spaces.
Falling yields and an increasing appetite for risk have spawned a new generation of ETFs, designed to compete with traditional money market funds.
Bond giant PIMCO recently launched two actively-managed ETF strategies aimed at the money market crowd: the
Enhanced Short Maturity Strategy ETF
Intermediate Municipal Bond Strategy ETF
In the mutual fund space, municipal bond mutual funds continue to see inflows. Funds like the
Federated Adjustable Rate Securities Fund
also offer investors current income consistent with minimal volatility -- the strategy sought by most money market fund investors.
Money market-fund alternatives have become increasingly attractive to investors in 2009 as money market fund yields steadily decline. As of mid-November, more than $452 billion had flowed out of money market funds year to date, and much of the money flowing out of them gas gone into municipal bond mutual funds.
The November launch of MUNI signaled a new option for municipal bond investors: an actively managed ETF approach from PIMCO. This fund is designed to offer low volatility exposure similar to money market mutual funds or more traditional municipal bond mutual funds. This ETF targets investors who are looking for tax except income, and features a low expense ratio of 0.35%.
Pimco's Enhanced Short Maturity Strategy Fund
was also launched in November, and is designed to compete with large money market mutual funds like
Fidelity's Cash Reserves
. MUNI seeks to provide investors with greater income and total return potential than money market funds by primarily investing in short duration investment grade debt securities.
MINT looks to gain advantage over FDRXX since it can hold longer-maturity bonds and a broader spectrum of investment-grade fixed-income securities. With an expense ratio of 0.35%, MINT also slightly undercuts the expense ratio of FDRXX, which is 0.39%.
The two Pimco funds, MINT and MUNI, were only launched very recently, so it is difficult to assess whether or not they have been seeing better performance than traditional money market mutual funds. However, for investors who want to get off the sidelines while avoiding volatility, these two ETFs represent a conservative way to possibly earn more than by investing in the money market.
The recent decision by the Federal Open Market Committee to target federal-funds rate near zero, affirmed by the central-bank last month, should continue to keep rates low in the foreseeable future. As frustrated investors flee low yields for higher ground, alternatives like MINT and MUNI should continue to see inflows of assets. Together, MINT and MUNI have attracted nearly $40 million in funds thus far.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion owned Federated Adjustable Rate Securities Fund.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.