NEW YORK--(BUSINESS WIRE)--The new money market fund rules recently announced by the SEC may lead investors to change how they view a broad range of short-term instruments, including what has been thought of as their “lowest risk” investments, according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
Rodilosso notes that once the rules are fully implemented in about two years, the prime money market funds could fluctuate in value and could have restrictions on redemptions. As such, they no longer may have the same value or function as pure liquidity mechanisms. By the same token, Exchange-Traded Funds (ETFs) and mutual funds that are short duration and feature high credit quality may look comparatively more attractive.
“These changes are likely to introduce a broader role for some instruments,” Rodilosso said. “ETFs could stand to benefit from lower transaction costs relative to traditional mutual funds. The downside, however, is the potential of ETF share prices to diverge from net asset value. Different solutions may address different concerns, but it’s unlikely that a single solution will work for all investors.”
Rodilosso points out that the two-year window for the implementation of the money market fund rules may potentially overlap at least in part with the beginning of a rate hike cycle by the U.S. Federal Reserve (the “Fed”). “When that cycle does begin and the Fed starts to push rates higher, the demand for short and very short duration instruments will likely be even greater than it is today,” the Market Vectors fixed income portfolio manager said. “Of greater concern is the potential for a hard turn in the credit cycle, similar to what happened six years ago. This could force some aggressive selling of the riskier money market funds.”
With all this in mind, Rodilosso thinks it is best that investors remain diversified. “It is a little scary to think that some money market funds can become liquidity traps, but that is what happened during the financial crisis,” he said. “Remaining diversified among asset classes may protect investors from risks they may not anticipate.”
Rodilosso continued, “That’s not to say one should avoid risk entirely, in fact there can be some potential benefit of mixing in some credit risk as well as some emerging markets risk, but this should be as part of a diversified fixed income portfolio. As for a short duration component, mixing floating rate notes and other short duration investment grade bonds still makes sense to me as well.“
Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHYTM), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), International High Yield Bond ETF (NYSE Arca: IHY®), and Renminbi Bond ETF (NYSE Arca: CHLC®). As of June 30, 2014, the total assets for these ETFs amounted to approximately $1.6 billion.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ©2014 Van Eck Global.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $24.8 billion in assets under management, as of June 30, 2014, making it one of the largest ETF families in the U.S. and worldwide.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.
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