Texas Capital Government Money Market ETF began trading on Wednesday under the ticker symbol "MMKT," aiming to carve out a share of the $6.3 trillion traditional money market fund industry. Although there are already other short-term bond ETFs on the market, MMKT is the first ETF to follow the so-called Rule 2a-7.
Rule 2a-7 is a legal provision established by the U.S. Securities and Exchange Commission (SEC) in the 1940s, specifically regulating money market funds. The rule strictly limits the investment scope of money market funds, requiring them to maintain a stable net asset value (NAV) of $1, with market-based returns and extremely high liquidity.
In 2010, to further strengthen risk control, the SEC revised Rule 2a-7, imposing stricter limitations on the liquidity, maturity, and asset quality of investment targets. When a money market fund's NAV falls below $1, the fund company must liquidate assets to cope with massive redemptions. Upon liquidation, investors receive the fund value of their held shares. Fund liquidation fairly protects investors' interests to some extent, ensuring that they do not suffer significant losses due to later redemption requests, safeguarding their rights.
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However, although MMKT's portfolio will have the characteristics of traditional money market funds and be subject to the same SEC regulations, there is a key difference—MMKT will not maintain a stable net asset value of $1 per share.
Data shows that MMKT has an annual expense ratio of 20 basis points and must invest 99.5% of its assets in cash or short-term government securities. According to filings with the SEC, its holding period can be as short as overnight (in the form of repurchase agreements) or as long as 13 months.
MMKT differs from existing cash ETFs. For example, the SPDR Bloomberg 1-3 Month Treasury Bond ETF (BIL), with assets under management of $34 billion, holds almost entirely short-term government bonds. However, BIL is only required to invest at least 80% of its assets in such holdings, with an expense ratio of 0.14%.
Edward Rosenberg, head of Texas Capital ETF and fund management, said, "Since the inception of ETFs, the money market has remained unchallenged." "Money market funds are considered cash equivalents, and no other ETF has this positioning."
For investors wondering why they might choose a tool with lower capital preservation stability, Texas Capital stated that there is an increasing acceptance of fluctuating net asset values in government money market funds and high-quality funds. Texas Capital also said that MMKT provides more intraday liquidity for institutional investors than traditional money market accounts.
Thanks to the Federal Reserve's aggressive interest rate hikes keeping short-term rates above 5%, investors have flocked to these relatively higher yields. The size of U.S. money market funds has surged in recent years, reaching a record high of $6.3 trillion this month. Although the Federal Reserve has started a rate-cutting cycle, Texas Capital sees an opportunity to capitalize on the still-strong demand for cash.
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