Ed Rosenberg, Head of ETF and Funds Management at Texas Capital, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the advantages of investing in money market securities in an exchange-traded fund (ETF) format.
Rule 35d-1 of the Investment Company Act of 1940 requires that mutual funds invest at least 80% of assets in securities consistent with the name of the fund and the investment policy disclosed in the prospectus. The Texas Capital Money Market ETF (MMKT) is the only ETF investing in money market assets following Rule 2a-7 under the Investment Company Act of 1940, which requires that 99.5% of assets are invested according to the stated strategy. For MMKT, this means Treasury bills, Treasury notes, Government agency securities, repurchase agreements, and overnight deposits, with limits on the weighted average maturity (WAM) of those securities.
From 2008 until early 2022, short-term interest rates were near zero, which substantially reduced demand for, and innovative launches of, money market funds. Over this same time period, ETFs experienced a large increase in assets and the number of fund launches. After the Fed raised rates in 2022, demand for money market funds increased. The combination of higher rates and growing ETF assets encouraged Texas Capital to launch the first ETF invested almost exclusively in money market assets.
Money market mutual funds have $6 trillion in assets, but many of those funds have a captive audience as part of a brokerage platform. A key advantage of holding money market assets in an ETF is the speed at which those assets can be redeployed in the market, as many investors may be holding money market assets in anticipation of immediately purchasing stocks during a quick decline in the equity market.
Proceeds from the sale of money market mutual funds may not be entirely available for trading until the next business day. In contrast, holding money market assets in an ETF rather than in a mutual fund allows the full proceeds to be available to invest intraday to quickly take advantage of a declining market. Investors don’t yet have the ability to automatically sweep cash balances into any ETFs.
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