Commentary below courtesy of Paul Amery, IndexUniverse.eu

Forbes columnist Ari Weinberg points out that bond ETFs should be seen as the “money market fund of tomorrow”, and he’s right.

Exchange-traded funds (ETFs) are well-positioned to make significant inroads into the US$2.7 trillion money market fund (MMF) sector, which is fighting a fierce rearguard action to maintain the fiction that fund net asset values can be kept stable.

In a vociferous lobbying campaign targeted at the US securities regulator, the Securities and Exchange Commission, a long list of US corporate and state treasurers say they can’t imagine a world in which MMFs might be allowed to “break the buck”—ie, have values that could fall below a dollar a share.

The chairman and namesake of the Charles Schwab Corporation, which manages US$160 billion in money market funds, told the SEC last month that MMFs are low-risk. “In 2008, at the depth of the financial crisis,” said Schwab, “only one money fund lost value for its clients. It lost one percent of its value; that is just one penny of the US$1.00-per-share price.”

But SEC chairman Mary Schapiro offers up a different version of events. She pointed out recently that over 300 money market funds have been bailed out by their sponsors since the 1970s. Just because MMF investors lost out only once or twice because fund sponsors stepped in to hide losses on the other occasions doesn’t mean that there isn’t risk to the whole system, in other words. Continue reading →