Schwab Prescibes ETF for Money Fund Malaise By Joe Morris

Charles Schwab has filed to launch an actively managed short-term bond exchange traded fund, in the latest sign that US fund managers see ETFs as the heirs to money market funds.

The company’s proposed Active Short Duration Income ETF, its first active ETF, which will invest in investment grade short-term fixed income securities, professes to share the same goals as money funds – capital preservation and daily liquidity. It will also forego the guarantee of a stable net asset value in exchange for the potential of modest investment gains.

A spate of other fund managers have launched similar ETFs or plan to, including Federated Investors, the third-biggest money fund provider, and iShares, whose parent, BlackRock, is the fourth biggest. The most successful of such ETFs has been Pimco’s Enhanced Short Maturity Strategy (better known by its ticker, Mint), which has amassed $2.2bn in assets.

The emergence of short-term ETFs coincides with a heavy gloom gripping the money fund industry. Persistently low interest rates have eaten into returns, and the Federal Reserve has promised the federal funds rate will remain “exceptionally low” at least through mid-2013.

Schwab has joined other money fund providers in waiving fees in order to prevent net asset values from slipping below the sacrosanct $1 per share level. In the first nine months of this year, such waivers cost it $445m, on top of more than $1bn over the course of 2010 and 2011.

Simultaneously, regulators are pressing for safeguards to prevent runs on money funds in the rare instance that they do dip below $1 per share, as occurred during the financial crisis. The proposed reforms, which include requiring the funds to abandon their stable net asset value policy and building up capital reserves, are liable to cost the funds business.

The short-term ETF forays suggest Schwab and others are hedging their bets on a money fund revival. Schwab’s filing occurred in the same week that its chief executive, Walt Bettinger, announced the company was endorsing a floating net asset value for institutional prime money funds, in a major concession to regulators.

Conspicuous in their absence from the short-term ETF market are Fidelity and JPMorgan Chase, the two biggest money fund providers. Fidelity is developing a line of ETFs but has not disclosed much about the offerings. JPMorgan, meanwhile, has filed to launch active ETFs but does not seem interested in following through. George Gatch, chief executive of the investment management Americas business at JPMorgan Asset Management, told Reuters in an interview a year ago that he does not consider active ETFs to be worthwhile for investors.