Money Market Funds, The SEC, And Grandma (Part II)

In Part I, we reviewed the SEC’s journey toward reforming the regulatory framework of U.S. money-market funds in an attempt to proactively mitigate the financial risk that emerged when the Reserve Primary Fund “broke the buck” in 2008 and helped to “freeze” the nation’s short-term credit network. The situation was volatile enough to prompt the U.S. Treasury to intervene to bailout the fund and stabilize the financial markets.

Although the reforms proposed on June 5th by SEC Chair, Mary Jo White, must move through a public comment period and then a thorough review by the SEC (it reviews all reform-related issues in light of the public comments it receives) before a final regulatory revision can be finalized and approved, you may want to begin to consider alternative investment instruments for your idle cash.  Even if you are convinced that no significant change will be made to the so-called “retail” money-market funds – consider this sobering fact:

According to an internet search of current rates, the posted yield on major brokerage money market funds (Fidelity, Vanguard, Schwab, E-Trade, and TD Ameritrade) was an ultra-puny 0.01%!  At that rate, the interest earned hardly justifies the cost of calculating and printing monthly statements.

Another way of analyzing investment return is to determine the length of time required to “double” your principal. Even if the rate was 5 times higher (at .05%), it would require 1440 years to double your money!

Given this glaring reality, you might agree that it behooves investors to consider alternative investment choices that fit one’s risk tolerance and investment objectives. During the next few weeks, I will be offering information on a range of options that you might consider attractive. I assure you that some of these possibilities will not be suitable for you, given your unique personal and financial profile. So (as always) consult with your preferred, trusted advisor prior to making any changes in your investment allocation.

Today we will consider four funds that most closely match the key metrics of money-market funds (all fund metrics are “as of” June 7th):

ULTRA SHORT BONDS

PIMCO Enhanced Short Maturity Strategy (MINT)

Effective Duration: [1]               0.96 years

SEC 30-day Yield:                    0.57%

Description:      Invests at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities (which may be represented by forwards). Issuers of the instruments held can include various U.S. and non-U.S. public- or private sector entities.  [All fund descriptions are from YahooFinance.com].

GRAPH: The graph above is a two-year chart of MINT.  It is a relatively established fund that has the highest duration of the four, but has been a decent performer. The red line is the 50-day EMA; the green line is the 200-day EMA.

SPDR Barclays 1-3 Month T-Bill (BIL)

Modified Adjusted Duration
(price sensitivity)                     0.13 years

SEC 30-day Yield:                -0.09%

Description:      The fund employs a replication strategy in seeking to track the performance of Barclays 1-3 Month U.S. Treasury Bill Index. It generally invests at least 80% of total assets in securities comprising the index or in securities that the investment adviser determines have economic characteristics that are substantially identical to the economic characteristics of the securities that comprise the index.

GRAPH: the chart above shows the price history of BIL. Don’t be fooled by what appears to be steadily declining prices. If you check the range, you’ll see that it is narrow.  It enjoys a low duration, but also a (currently) low (negative) yield.

Guggenheim Enhanced Short Duration Bond (GSY)

Average Duration        0.37 years

SEC 30-day Yield       1.02%

Description:     The fund will invest at least 80% of its net assets in fixed income securities. It uses a low duration strategy to seek to outperform the Barclays Capital1-3 Month U.S. Treasury Bill Index, in addition to providing returns in excess of those available in U.S. Treasury bills, government repurchase agreements, and money market funds, while seeking to provide preservation of capital and daily liquidity. (The fund may invest, without limitation, in short-term instruments such as commercial paper and/or repurchase agreements.)

GRAPH:  The graph above is for GSY. It has a relatively low standard deviation, but also low volume (therefore relatively low liquidity).  On the plus side, it has duration one third that of MINT and (currently) a higher yield.

SHORT GOVERNMENT BONDS

iShares Barclays Short Treasury Bond (SHV)

Effective Duration                   0.40 years

SEC 30-day Yield:                   0.00%

Description:      The fund generally invests at least 90% of its assets in the bonds of the Barclays U.S. Short Treasury Bond Index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of between one and 12 months.

GRAPH: The graph above depicts the price action of SHV. Note the (relatively) stable (non-volatile) price pattern; however, the current yield is lower than that of money-market funds.

I suggest that you print this report and then watch for further articles here (in the days ahead) offering additional alternatives for your review. Months ago, I gave up on money-market funds for my portfolio (but not, of course for my mother’s assets). Instead, I pieced together a mix of fixed income funds that, in the aggregate, offers me a higher yield at an acceptable level of risk.  I pay particular attention to the combined duration.

To help you discern the relative rewards and risks of these funds, here is a side-by-side chart of the four options. The MINT fund is the solid blue pattern.  GSY is the brown line; SHY is the light green line; BIL is the light blue line. I hope you have found this helpful.

DISCLOSURE: The author owns shares of MINT, but none of the other funds. All of the price charts are created through YahooFinance.com. The fund yield and duration metrics are from ETFTrends.com.

Submitted by Thomas Petty MBA CFP


[1] DURATION is a measure of fixed income investment risk. There are two main types of “duration”: a) “weighted average of time until cash flows are received” (measured in years) and b) “price sensitivity (the percentage change in price for a given unit change in yield)”. When yield is continuously compounded, the values will be numerically equal. The “weighted average of time” measure of duration is the most commonly used.  The higher the number, the greater the risk.

Be Sociable, Share!

Related Posts

 

One thought on “Money Market Funds, The SEC, And Grandma (Part II)

  1. Natural Mineral Specimens

    You really make it appear really easy together with your presentation however I to find this matter to be really something that I feel I might never understand. It kind of feels too complex and very broad for me. I am having a look forward to your next submit, I will try to get the dangle of it!

Comments are closed.

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.