Are You “In the Money” with Your Money Market ETF?

Investors are discovering that some money market ETFs are delivering negative returns

Jose Garcia-Zarate 14 September, 2012 | 1:00PM

Paying for the privilege of capital preservation is not an unusual practice in times of heightened uncertainty. This year investors have been willing to pay a fee in the form of negative yields to the German and Swiss governments in order to access a safe short-term parking place for their money. While one can argue endlessly as to whether the rationale behind these money flows is sound, what is clear is that these investors were fully cognisant of the terms of the trade. In other words, they were happy to lose a bit of money in order to preserve the bulk of it. However, a totally different situation arises when investors engage in capital preservation strategies not expecting to lose capital and end up unwittingly doing so. This may have been the case for investors in some European EUR-denominated money market exchange-traded-funds (ETFs).

Some money market ETFs have effectively become “capital-eroding” investment propositions

A large swathe of investors in money market funds do not seek a financial reward, but rather a near risk-free vehicle in which to park cash during periods of transition or uncertainty in their asset allocation decision-making process. But they generally do so under the assumption that returns after fees should ideally marginally beat, or at least equal, those obtained by placing cash in a bank deposit. In fact, for these investors the worst case scenario would be for zero returns after management fees (note – we are speaking in terms of nominal returns, inflation is not factored in). Very few, if any, would consider the possibility of negative returns. After all, money market funds are designed to keep a constant net asset value (NAV), aren’t they? While most traditional money market funds do (for the time being, at least), money market ETFs are not like traditional funds.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Deka Dt. Boerse EUROGOV® Ger MM ETF71.02 EUR0.10
iShares eb.rexx® Money Market (DE)76.00 EUR-0.11

About Author

Jose Garcia-Zarate

Jose Garcia-Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

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