The new money market fund rules recently announced by the SEC
may lead investors to change how they view a broad range of
short-term instruments, including what has been thought of as their
“lowest risk” investments, according to Fran Rodilosso, fixed
income portfolio manager for Market Vectors ETFs.
Rodilosso notes that once the rules are fully implemented in
about two years, the prime money market funds could fluctuate in
value and could have restrictions on redemptions. As such, they no
longer may have the same value or function as pure liquidity
mechanisms. By the same token, Exchange-Traded Funds (ETFs) and
mutual funds that are short duration and feature high credit
quality may look comparatively more attractive.
“These changes are likely to introduce a broader role for some
instruments,” Rodilosso said. “ETFs could stand to benefit from
lower transaction costs relative to traditional mutual funds. The
downside, however, is the potential of ETF share prices to diverge
from net asset value. Different solutions may address different
concerns, but it’s unlikely that a single solution will work for
all investors.”
Rodilosso points out that the two-year window for the
implementation of the money market fund rules may potentially
overlap at least in part with the beginning of a rate hike cycle by
the U.S. Federal Reserve (the “Fed”). “When that cycle does begin
and the Fed starts to push rates higher, the demand for short and
very short duration instruments will likely be even greater than it
is today,” the Market Vectors fixed income portfolio manager said.
“Of greater concern is the potential for a hard turn in the credit
cycle, similar to what happened six years ago. This could force
some aggressive selling of the riskier money market funds.”
With all this in mind, Rodilosso thinks it is best that
investors remain diversified. “It is a little scary to think that
some money market funds can become liquidity traps, but that is
what happened during the financial crisis,” he said. “Remaining
diversified among asset classes may protect investors from risks
they may not anticipate.”
Rodilosso continued, “That’s not to say one should avoid risk
entirely, in fact there can be some potential benefit of mixing in
some credit risk as well as some emerging markets risk, but this
should be as part of a diversified fixed income portfolio. As for a
short duration component, mixing floating rate notes and other
short duration investment grade bonds still makes sense to me as
well.“
Mr. Rodilosso has over 20 years of experience trading and
managing risk in fixed income investment strategies, including more
than 17 years covering emerging markets. Among the Market Vectors
ETFs under his watch are Investment Grade Floating Rate ETF (NYSE
Arca: FLTR®), Treasury-Hedged High Yield Bond ETF (NYSE Arca:
THHYTM), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM),
Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Emerging
Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Fallen Angel
High Yield Bond ETF (NYSE Arca: ANGL®), International High Yield
Bond ETF (NYSE Arca: IHY®), and Renminbi Bond ETF (NYSE Arca:
CHLC®). As of June 30, 2014, the total assets for these ETFs
amounted to approximately $1.6 billion.
Please note that the information herein represents the opinion
of the portfolio manager and these opinions may change at any time
and from time to time. Not intended to be a forecast of future
events, a guarantee of future results or investment advice. Current
market conditions may not continue. Information contained herein
has been obtained from sources believed to be reliable, but not
guaranteed. ©2014 Van Eck Global.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since
2006 and span many asset classes, including equities, fixed income
(municipal and international bonds) and currency markets. The
Market Vectors family totaled $24.8 billion in assets under
management, as of June 30, 2014, making it one of the largest ETF
families in the U.S. and worldwide.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in
1955, Van Eck Global was among the first U.S. money managers
helping investors achieve greater diversification through global
investing. Today, the firm continues this tradition by offering
innovative, actively managed investment choices in hard assets,
emerging markets, precious metals including gold, and other
alternative asset classes.
There are risks involved with investing in ETFs, including
possible loss of money. Shares are not actively managed and are
subject to risks similar to those of stocks, including those
regarding short selling and margin maintenance requirements.
Ordinary brokerage commissions apply. Debt securities carry
interest rate and credit risk. Interest rate risk refers to the
risk that bond prices generally fall as interest rates rise and
vice versa. Credit risk is the risk of loss on an investment due to
the deterioration of an issuer's financial health. The Funds'
underlying securities may be subject to call risk, which may result
in the Funds having to reinvest the proceeds at lower interest
rates, resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and
a greater risk of loss of income and principal than those holding
higher rated securities. As the Funds may invest in securities
denominated in foreign currencies and some of the income received
by the Funds may be in foreign currency, changes in currency
exchange rates may negatively impact the Funds’ returns.
Investments in emerging markets securities are subject to elevated
risks which include, among others, expropriation, confiscatory
taxation, issues with repatriation of investment income,
limitations of foreign ownership, political instability, armed
conflict, and social instability. The Funds may loan their
securities, which may subject them to additional credit and
counterparty risk. The Funds may be subject to risks associated
with investing in high-yield securities; which include a greater
risk of loss of income and principal than funds holding
higher-rated securities, as well as concentration risk; credit
risk; hedging risk; interest rate risk; and short sale risk.
Investors should be willing to accept a high degree of volatility
and the potential of significant loss. For a more complete
description of these and other risks, please refer to the Funds’
prospectus and summary prospectus.
The “net asset value” (NAV) of an ETF is determined at the close
of each business day, and represents the dollar value of one share
of the ETF; it is calculated by taking the total assets of an ETF
subtracting total liabilities, and dividing by the total number of
shares outstanding. The NAV is not necessarily the same as an ETF's
intraday trading value. Investors should not expect to buy or sell
shares at NAV. Total returns are based upon closing “market price”
(price) of the ETF on the dates listed.
Fund shares are not individually redeemable and will be issued
and redeemed at their NAV only through certain authorized
broker-dealers in large, specified blocks of shares called
“creation units” and otherwise can be bought and sold only through
exchange trading. Creation units are issued and redeemed
principally in kind. Shares may trade at a premium or discount to
their NAV in the secondary market.
Diversification does not assure a profit nor does it protect
against a loss.
Investing involves substantial risk and high volatility,
including possible loss of principal. Bonds and bond funds, in
general, will decrease in value as interest rates rise. An
investor should consider the investment objective, risks, charges
and expenses of a Fund carefully before investing. To obtain a
prospectus and summary prospectus, which contain this and other
information, call 888.MKT.VCTR or visit
marketvectorsetfs.com. Please read the
prospectus and summary prospectus carefully
before investing.
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