BlackRock has filed to launch a money market, fund of funds ETF, we learned from Wells Fargo Securities Strategist Garret Sloan. He wrote last week, "In a recent SEC registration filing, BlackRock has introduced an interesting new product called the BlackRock Collateral Trust, which is designed as an ETF, in which the principal investment strategy is to invest "at least 80% of its net assets in a portfolio of U.S. dollar-denominated government securities and other money market securities eligible for investment by U.S. government money market funds (including indirect investments through the Underlying Funds)." We examine BlackRock's SEC filing and Sloan's comments below. We also review a "Money Market Fund Planning Update," from SEI Investments, which discusses the liquidation of 5 money funds and the launch of 2 new ultra-short bond funds.
The new BlackRock Collateral Trust filing states, under "Principal Investment Strategies," "As of the date of this Prospectus, the Fund intends to invest a substantial portion of its assets in the following government money market funds, which principally invest in short-term U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities, and repurchase agreements secured by such obligations: FedFund and T-Fund (each, a series of BlackRock Liquidity Funds); and BlackRock Premier Government Institutional Fund and BlackRock Select Treasury Strategies Institutional Fund (each, a series of Funds For Institutions Series). BFA may add, eliminate or replace any or all Underlying Funds at any time. BFA or its affiliates may advise the Underlying Funds. The Fund generally allocates and reallocates its assets among the Underlying Funds on a monthly basis on an approximate pro rata basis based on the amount of net assets of each Underlying Fund."
It continues, "The Fund itself will invest only in money market securities eligible for investment for funds that comply with Rule 2a-7, but will not be subject to other requirements of Rule 2a-7 applicable to money market funds that seek to maintain a stable NAV. The Fund is an actively managed exchange-traded fund ("ETF") that does not seek to replicate the performance of a specified index. The Fund may have a higher degree of portfolio turnover than funds that seek to replicate the performance of an index. Each Underlying Fund is a "government money market fund," as defined in Rule 2a-7 and seeks to maintain a stable NAV of $1.00. The Fund, however, is not a money market fund and does not seek to maintain a stable NAV of $1.00."
Wells' Sloan comments, "The fund is expected to invest on a pro-rata basis in each of the four funds based on the assets-under-management of each fund. At the outset, the fund will invest 50 percent in the T-Fund, 35 percent in the FedFund, 10 percent in the Premier Government Institutional Fund and 5 percent in the Select Treasury Strategies Institutional Fund. The ETF will be valued at 12pm Eastern time each day and "shares of the Underlying Funds normally are valued at fair value based on their NAV from the prior business day." In other words, the value of the ETF will in all likelihood be $1 every day, given that it will be fully invested in Constant NAV government funds."
He adds, "Is there an advantage to the ETF over simply investing in the government funds themselves? From a yield perspective the answer is likely no. Moreover, the cutoff times for transactions are slightly earlier in an ETF given that they stop trading at the close of the exchange, which is 4pm, but the BlackRock Collateral Trust prospectus notes that purchase and redemption requests typically need to be made prior to 2pm. Current government fund cutoff times for redemptions and purchases are generally in the neighborhood of 4:30pm–5pm. The ETF also notes that "deliveries of redemption proceeds by the Fund generally will be made on the same Business Day a redemption request is received.""
While we have seen some ultra-short and short-term bond ETF launches the past few years, including BlackRock iShares Ultra Short Term Bond and Short Maturity Bond ETFs, Guggenheim Enhanced Short Duration, PIMCO Enhanced Short Maturity ETF, SSGA SPDR Ultra Short Term Bond ETF, and Vanguard Short Term Bond ETF, we've yet to see any be really successful in the money market fund space to date.
In other news, SEI Investments' "Money Market Fund Planning Update" details the manager's fund closures and fund launches. It says, "SEI currently manages nine money market funds across three different styles. Estimated closure dates for five prime and tax-free money market funds are announced below. The status of the other funds is also provided." SEI is closing 5 funds – Tax-Free and Institutional Tax-Free (on 7/22); SEI Liquid Assets Trust Prime Obligations and SEI Daily Income Trust Prime Obligations (on 7/22); and Daily Income Trust Money Market (on 6/24). It is keeping 4 funds – SDIT Treasury, SDIT Treasury II, SDIT Government, and SDIT Government II.
The update explains, "In consideration of the impacts these reforms will have on our funds, as mentioned in our initial Money Market Fund Planning communication, we designed a plan to restructure our offerings in order to best meet the needs of our clients: Launch two new mutual funds -- one taxable and one tax-free -- which will be conservative, short-term bond funds to serve as investment vehicles in client portfolios; Liquidate existing prime and tax-free money market funds, and transition assets to either our government money market funds (when held for cash sweep purposes) or the new conservative bond funds; Continue offering SEI's government money market funds. These will act as the cash sweep component of accounts for institutional and high net-worth clients held at SEI Private Trust Company." For more on SEI's plans, read our March 29 News, "Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt."
Finally, the US Department of Labor issued a press release announcing a settlement between Invesco and its Investors over undisclosed losses related to a non-2a-7 "collective fund" used in ERISA accounts. The DOL says, "The U.S. Department of Labor's Employee Benefits Security Administration has reached a settlement agreement with a subsidiary of Invesco Ltd., an Atlanta-based investment management firm. Invesco Trust Company agreed to pay a total of $10.27 million to settle the department's claims that they violated the Employee Retirement Income Security Act. Invesco operated the Invesco Short-Term Investment Fund, a multi-billion dollar collective fund composed of ERISA plan assets. The department contended that Invesco violated ERISA when it undertook a series of measures to ensure that the ISTIF continued to trade at $1 although the fund's net asset value had fallen below $1 due to losses in the value of the fund's securities holdings."
It adds, "One measure Invesco took was having an affiliate enter into a series of support agreements to provide contingent financial support to the ISTIF without adequately informing the fund's investors. Invesco also retained a portion of the income earned by the ISTIF to increase the fund's net asset value instead of distributing that income to investors. Retaining a portion of the ISTIF's income in the fund not only reduced the distributions to plan investors in the ISTIF, but also reduced the obligations of Invesco's affiliate under the support agreements."
Note: Invesco tells us that the DOL action involved a "collective trust" which was not a "money market funds" (contrary to some press reports). They say they acted in the best interests of shareholders and made sure the trust traded at $1.00, waiving fees and making a voluntary payment into the vehicle.
