Are Money Market ETFs the Next Big Money Maker for the ETF Industry?

BlackRock iShares

BlackRock recently filed for two new money market ETFs: the iShares Prime Money Market ETF and the iShares Government Money Market ETF. Both aim to provide stability of principal, monthly distributions, and a focus on highly liquid, short-term fixed-income securities.

The portfolios for both ETFs will consist of securities maturing in 397 days or less (with certain exceptions). Additionally, they will maintain a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less, ensuring a highly liquid and stable structure.

The key difference lies in their allowable holdings, based on regulatory distinctions. Government money market funds, like the iShares Government Money Market ETF, must allocate at least 99.5% of their portfolios to U.S. government obligations, such as Treasury securities, Treasury obligations, and repurchase agreements backed by government assets.

In contrast, prime money market funds, like the iShares Prime Money Market ETF, can invest more broadly. These holdings may include commercial paper, repurchase agreements, tender option bonds, floating-rate notes, and municipal trust certificates.

One important distinction to note: the NAV of these ETFs will not be fixed at $1. Unlike traditional money market mutual funds, ETFs trade throughout the day rather than being priced once daily at market close. The ETF creation/redemption process, which is essential for maintaining liquidity and keeping the ETF's price aligned with its NAV, prevents a fixed $1 NAV.

This means there is a small chance of losing money. For instance, if you buy one of these ETFs the day before its ex-distribution date, the share price could drop by the amount of the distribution. While this drop would be temporary until the distribution payout is received, it could leave you with an unrealized loss in the short term.

Texas Capital

One firm has already beaten BlackRock iShares in the money market ETF race: Texas Capital. In September 2024, they launched the Texas Capital Government Money Market ETF

This ETF allocates at least 99.5 percent of its total assets to cash, U.S. government securities—including fixed, floating, and variable rate instruments—and repurchase agreements fully collateralized by U.S. government securities or cash.

While the ETF's website has not yet indicated a seven-day SEC yield, it charges a 0.20 percent expense ratio, which is reasonable for this niche segment.

So far, MMKT appears to be fairly liquid, with a 30-day bid-ask spread of just one basis point. As of November 22, 2024, it has accrued $42.69 million in assets under management.

My thoughts on money market ETFs

All in all, I remain conflicted about whether money market ETFs will truly revolutionize the ETF space and spell the end for money market mutual funds, or whether they'll simply become another niche product for investors and advisors to explore.

For evidence of their potential success, I turn to Canada. The country has seen numerous high-profile money market ETFs thrive over the years.

BlackRock's iShares Premium Money Market ETF (CMR), for instance, has been around since February 2008, charges a low 0.13 percent expense ratio, and boasts $1.3 billion in assets under management.

Similarly, BMO offers the BMO Money Market Fund ETF Series (ZMMK), which is even larger with $2.9 billion in assets. These ETFs have proven their value as successful alternatives in Canada's market, with other providers following suit.

However, I struggle to see how these new money market ETFs in the U.S. will differentiate themselves functionally from existing ETF competitors to money market mutual funds, such as Treasury bill (T-bill) ETFs and ultra-short-term bond ETFs.

Both T-bill and ultra-short-term bond ETFs, which we've previously highlighted in an article on replacing savings accounts and CDs with ETFs, already offer most of what these new money market ETFs promise: very low volatility and monthly distributions tied to prevailing rates. They even hold similar underlying assets and have comparable expense ratios.

These ETFs are already being used as substitutes for money market mutual funds. While they lack the fixed $1 NAV of traditional money market funds, they make up for it with higher liquidity.

If the new money market ETFs don't differentiate themselves with a fixed $1 NAV, I see a scenario where retail investors and advisors alike fail to distinguish them meaningfully from Treasury bill ETFs and ultra-short-term bond ETFs.

The success of money market ETFs may depend on whether they can provide a clear and distinct advantage over these existing alternatives and communicate that to advisors and retail.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.