Money-market funds have some serious problems. Originally conceived as high-return parking places for investors, they've been stuck at historic lows for years -- forcing many yield-hungry investors to seek better returns elsewhere.
Oddly, money funds that own mostly U.S. government securities like Treasurys and agency mortgage-backed securities have remained stubbornly popular. These funds have the lowest yields of all, and yet, since early August, when some prognosticators began floating the possibility of another recession, these funds have seen significant inflows. The short-term government securities these funds hold are the least susceptible to interest rate swings -- as rates rise they'll hold up better than other types of bonds. Unfortunately, many of these money-market options are either closed to new investors or are only available to large accounts.
For smaller investors looking to park cash safely, there may be a better opportunity in exchange-traded funds. While most ETFs track a slice of the stock market (or the whole shebang), several ETFs invest in very short term corporate and government debt, making them an attractive alternative to money funds.
The $1.4 billion Pimco Enhanced Short Maturity Strategy ETF (MINT)
The Pimco fund's yield comes with slightly more risk than money-market funds, which are regulated by the Securities and Exchange Commission to focus on credit quality and liquidity. It has a duration of 0.63 years, more than twice that of money market funds, making it more susceptible to interest-rate risk. (For more on duration and the impact of interest rate moves on bond portfolios, read Stress Test Your Bond Portfolio.) In theory, the ETF also takes more risk than typical money market funds by holding mostly short-term corporate debt. Recently, however, some investors have questioned the "safety" of credits once deemed safe enough for money market funds -- namely, European banks and countries.
For more risk-averse investors who still want a liquid investment, there are two ETFs that hold short-term U.S. Treasurys. They are cheaper than most government money-market funds and still provide as much safety. But, just like government money funds, they provide little yield. The $3.1 billion SPDR Barclays Capital 1-3 Month Treasury Bill ETF (BIL)
Ari I. Weinberg is the tools editor for the Wall Street Journal Digital Network. He writes occasionally about ETFs and the markets for SmartMoney and the Wall Street Journal.