Money Market ETF: A Secure Investment?

A money market ETF has money market accounts as its underlying investment.  Money market accounts are investment accounts. They are usually managed in a very conservative manner. They usually are invested in Treasury bills, certificates of deposit, commercial paper, and other low risk investments. Also, they usually allow holders to draw money from the account using a checkbook.  Maintaining cash, or other highly liquid  holdings is very desirable to investors during tough economic times. Money market ETFs are also very desirable to investors who want to move in and out of the market very quickly and on a daily basis, in order to quickly take advantage of investment opportunities. Money Market ETFs are also popular among investors who want somewhere to park their cash on the sidelines for a while. Whether money market ETFs are as secure as they are marketed to be depends on the ETF in question. Some are more secure than others. To really gauge the security of an individual money market ETF, you have to look at its expense ratio, and its holdings.

Examples of Money Market ETFs

  • The first true money market ETF was Claymore’s Premium Money Market ETF. This ETF invest in high quality and short term debt securities. These securities include treasury bills, promissory notes issued by the Canadian Government, banker’s acceptances, and commercial paper. The ETF has an expense ratio of 0.25%, which is quite low. 
  • iShares Lehman Short Treasury Bond Fund is another option for investing in money market ETFs. It tracks an index of U.S. Treasury Bonds with an effective  duration of a third of a year. 
  • WisdomTree U.S. Current Income fund was the the first true U.S Money Market ETF. It is an actively managed ETF. The fund holds 43.49% government bonds and 56.51% commercial paper. The fund has an average yield to maturity of 2.23% The closest thing to a money market ETF in the United States was the Bear Stearns Current Market Fund. However, this fund had securities that had the discretion to extend its duration beyond 180 days, which makes the fund technically be beyond the scope of the definition of a money market fund. 
  • PowerShares VRDO Tax-Free Weekly Portfolio offers an exchange traded fund that is designed to act like a tax free money market fund. It tracks the performance of a basket of variable rate demand obligations called VRDOs. VRDOs are long term fixed rate  municipal bonds. However, they tend to act like short term floating rate note. VRDOs are popular with money market funds. This is because they yields slightly more than many other short term instruments and are considered safe investments. These investment instruments are similar to money market instruments because the investor can demand repayment with seven days notice. The interest rate on these instruments is reset each week at prevailing money market rates.
  • If you want to invest in foreign countries through a money market ETF, consider The WidomTree Dreyfus Emerging Currency Fund. This fund provides exposure to money market rates across 11 emerging market countries.
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