What Are Money Market ETFs?

Key Takeaways:

• Money market ETFs invest in short-term, high-quality debt for safety.
• Low expense ratios are among their benefits.
• They generate higher yield than other short-term instruments.
• These ETFs are often used to park short-term cash.

When a new financial instrument launches and amasses assets fast, that's usually a sign that the investment type, rather than the specific vehicle, is in high demand.

The Simplify Government Money Market exchange-traded fund (ticker: SBIL) made its debut on July 15, and quickly grew to $2.1 billion in assets under management (AUM) within a week.

Money market ETFs are attracting investor interest fast. The first such product, the Texas Capital Government Money Market ETF (MMKT), became available in September 2024.

Other recently launched money market ETFs include the iShares Government Money Market ETF (GMMF) and the iShares Prime Money Market ETF (PMMF). These have also grown quickly.

Money market ETFs offer a modern twist on traditional money market mutual funds.

Familiar Product in a New Wrapper

Like their mutual fund counterparts, money market ETFs invest in short-term, high-quality debt to provide safety, liquidity and modest yields.

"Until recently, money markets were only available in a mutual fund wrapper, trading once a day at their net asset value (NAV), with funds seeking to maintain a stable $1 share price," says Brian Schaefer, vice president and portfolio manager at Johnson Financial Group in Milwaukee.

"Money market ETFs, including those offered by investment giants like BlackRock, trade intraday just like other ETFs," he adds. "Their share price can move up and down based on the market, albeit with much lower volatility than riskier asset classes."

This intraday trading can benefit investors who want quicker access or more control over timing.

Lower Expense Ratios

Money market ETFs may also have lower expense ratios than mutual funds, and often carry no investment minimums. One possible small drawback relative to mutual funds: Money market ETFs don't have a fixed NAV of $1.

That may worry especially conservative investors because money market ETFs don't guarantee a stable $1 share price, introducing a small risk to principal that you won't find in money market mutual funds.

Adding a Layer of Liquidity

While money market ETFs and traditional money market mutual funds invest in similar high-quality, short-term instruments, a key difference lies in how they're traded.

"For investors, the underlying return profile is the same; however, ETFs offer a lot more flexibility," says Josh Bubar, managing partner at Velox Trading Group in Toronto. The intraday trading offers better liquidity and transparency, which can help with intraday cash management in a client portfolio, he adds.

Good Option for Short-Term Cash?

While money market instruments are liquid, they typically have a day or two delay before an account owner can access the cash, says Myles Zueger, a wealth advisor at Adams Wealth Partners in Nashville, Tennessee.

For example, an investor can usually withdraw cash faster through a savings account or a sweep account. The latter automatically "sweeps" uninvested cash, such as dividends, interest, or proceeds from sales, into a short-term investment vehicle to earn some yield until you're ready to reinvest it.

Some brokerages use money market ETFs as sweep accounts to park funds at the end of the trading day.

"But for those who want their idle cash working a little harder, they're worth a look," Zueger says.

Investing for Higher Yield

Money market ETFs typically generate a better return than other short-term investments.

"The reason that money market investments have a better yield comes from what they invest in," says Angelo DeCandia, a business and accounting instructor at Touro University in New York.

Investments such as Treasury bills, commercial paper and bankers' acceptances generally make up the investment portfolio of money market funds, he adds. These provide a greater return than alternative short-term investments.

Treasury bills are short-term U.S. Treasury debt. Commercial paper represents unsecured loans issued by creditworthy corporations to finance their immediate liabilities, like payroll or inventory. Bankers' acceptances are short-term debt instruments, typically used in international trade.

Effects of Rising Interest Rates

Money market ETFs respond quickly to rising interest rates, which benefits investors, Bubar says. "Generally, rising interest rates are a win for money market ETFs," he says. Because these ETFs invest in debt instruments like Treasury bills and commercial paper, which have very short maturities, they rapidly reinvest the principal, as the securities mature, into new securities that reflect the higher prevailing rates.

The short maturities of the underlying securities mean money market ETFs have extremely low interest rate sensitivity, much less than intermediate- or long-term bond funds.

Those characteristics also apply to money market mutual funds, so the two types of investments behave the same way in response to interest rate changes. The key differences, again, are in trading mechanics, pricing and possibly fees, rather than in yield behavior or rate responsiveness.

Understand Potential Risks

Money market ETFs and mutual funds are not protected by the Federal Deposit Insurance Corp. (FDIC) like bank accounts are. That means they're subject to the same market risks as stock and bond ETFs or run-of-the-mill mutual funds.

"Like most investments, the yield on money market products rises and falls with the general levels of interest created by the Federal Reserve and is also subject to the ups and downs of the supply and demand for these investments," DeCandia says.

"Consequently, yields often change and money market ETFs are subject specifically to what we call market risk," he adds.

As seen in U.S.News.com