Barron's writes that, "Money-Market ETFs Have Arrived. Should You Buy One?" They explain, "Not too long ago, investors who wanted to park cash in an exchange-traded fund version of a money-market mutual fund had to settle for ultrashort-dated bond ETFs as a proxy. That has changed with the recent launch of a few money-market ETFs, which have quickly gained assets, even as the Federal Reserve cuts interest rates. The handful of money-market ETFs include the $3.4 billion Simplify Government Money Market, the $361.2 million iShares Prime Money Market, the $269.3 million Schwab Government Money Market, the $77.2 million iShares Government Money Market, and the $60 million Texas Capital Government Money Market, which kicked off the category when it launched in September 2024."
The piece tells us, "Their assets are still a drop in the bucket of the $7.4 trillion sitting in traditional money-market funds, according to the Investment Company Institute.... The new ETFs follow the strict Securities and Exchange Commission guidelines regulating money-market funds. Those rules mandate that the funds invest in mostly daily and weekly liquid, diversified, high-quality debt. Investors often use the funds as de facto savings accounts, so the liquidity characteristics are important. Steve Laipply, global co-head of iShares fixed-income ETFs at BlackRock, says the asset manager designed its funds for such investors."
Barron's adds, "The main difference between money-market mutual funds and their ETF counterparts is that the former have a stable $1 net asset value. Money-market ETFs trade intraday like any fixed-income ETF, so the market price may fluctuate above or below the NAV. That could affect the value of your investment when it’s time to cash out."
For more on Money Market ETFs, see these Crane Data News stories: "BlackRock Money Market ETFs Go Live; Ondo Finance on Tokenized MMFs (2/6/25), "VettaFi Discusses Money Market ETFs" (12/11/24), "Dec. MFI: Assets Break $7.0 Tril; Top 10 of 2024; BlackRock MM ETFs" (12/6/24), "BlackRock Debuts First Euro MM ETF" (12/5/24), "FT on BlackRock Money Market ETFs" (11/18/24), "November BFI: Bond Funds Hit by Election; ETF Trends MM Substitutes" (11/15/24), "BlackRock Files for Money Market ETFs" (11/12/24) and "Texas Capital Launches Govt MM ETF" (9/26/24).
In other news, J.P. Morgan recently published a piece titled, "MMF AUMs: Still here, and heading higher." It states, "The topic of MMF cash has once again come to the forefront as the Fed prepares for another round of rate cuts. This renewed attention has been driven by the persistent demand for MMFs throughout the year, resulting in record-high balances of $7.6tn.... Indeed, YTD, taxable MMF AUMs have surged by an impressive ~$580bn, mirroring the pattern observed in 2024.... Typical seasonal inflows in 4Q, combined with current interest rates, could easily push these balances towards $7.7tn or higher by year-end."
JPM continues, "However, the substantial cash held in MMFs does not necessarily imply an imminent rotation into riskier assets. While MMF cash levels are elevated in nominal terms, a broader perspective—such as comparing MMF AUMs to GDP or commercial bank deposits—reveals that these levels are not unprecedented, though they have been trending higher in recent years and are approaching peaks.... MMF AUM currently represents 24% of GDP and approximately 41% of deposits."
They say, "Furthermore, it is also important to consider the purpose for which cash is held in MMFs—whether for cash management and liquidity needs or as an investment asset class within a portfolio. Predominantly, market participants utilize MMFs for the former, viewing them as low-cost, efficient, and transparent vehicles that provide market-based returns. This is especially true for institutional MMF shareholders, such as corporations and state and local governments, who typically prioritize capital preservation over yield. Currently, $4.7 trillion of cash held in MMFs is institutional cash, and it is unlikely that this will be reallocated into equities or longer-duration fixed income."
JPM comments, "There is, however, a case to be made for potential outflows from retail MMFs. Retail investors tend to be more sensitive to interest rate changes, as evidenced by significant inflows over the past three years.... Nevertheless, we do not believe retail investors are currently overallocated to cash to the extent that a substantial rotation into other assets is necessary."
They explain, "As our equity colleagues highlight, mutual fund data -- which serves as a proxy for retail investment exposure -- shows that cash allocated to MMFs accounts for less than 20% of all mutual fund assets, while equities comprise over 60% and bonds 20%.... This suggests retail investors are not necessarily under pressure to reallocate, in contrast to the 2009–2012 period when MMFs represented 40% of mutual fund allocations."
JPM also says, "Additional factors support the likelihood that cash will remain in MMFs. Bank deposits continue to offer yields that are significantly lower than those of MMFs.... Even as the Fed begins to cut rates, the yield spread between cash and bonds is expected to remain relatively flat throughout next year, providing little incentive to extend duration.... Meanwhile, equity markets continue to reach record highs, raising concerns about potential overvaluation."
They continue, "Demographic trends, particularly as they relate to the aging U.S. population, also favor holding more cash. Anecdotally, the increasing allocation to alternative assets (e.g., private equity, private credit, etc.) as long-term investments also encourages maintaining higher levels of liquidity. Market expectations for the terminal fed funds rate have fluctuated between 2.85% and 4.19% this year, with the most recent reading at 2.98%.... Unless rates fall meaningfully below 3%, we believe MMF cash balances are unlikely to shift significantly in the near term."
JPM concludes, "Nonetheless, there remains a possibility that some cash could move out of MMFs. We are often asked how much is vulnerable to flight risk. While precise data is unavailable, we think approximately $800bn -- primarily retail cash that flooded into MMFs as the Fed raised rates, minus some of the inflows that occurred in 2023 following the regional banking crisis as investors sought diversification away from deposits -- could be at risk. However, as discussed above, whether or not this outflow materializes depends on interest rates, market conditions, and investor preferences."
