Boring money market funds face innovation: Moody’s

Earlier this year, BlackRock and Charles Schwab launched money market ETFs, it noted, while BlackRock also launched a tokenized MMF last year and the report said that Fidelity is planning to launch one this year too.

Traditional money market funds “are currently in strong demand,” Moody’s said — with AUM rising 13.6% in the U.S., and 16.7% in Europe, last year — amid “a broadly supportive economic environment and still attractive MMF yields.”

However, these new vehicles that offer the same basic proposition as traditional funds — low risk and high liquidity — also come with the added benefits of “greater flexibility, transparency and lower costs than traditional MMFs.” 

For instance, a key advantage of ETFs is that they allow investors “to exit or enter positions immediately, whereas traditional MMF trades are executed with a lag,” it said. 

“ETFs are also subject to strict market regulation, ensuring the same high standards of investor protection as traditional funds and may also offer lower management fees,” Moody’s said.

At the same time, “Tokenization is a promising technology for the [money market fund] sector as it will allow investors to post collateral without selling underlying assets, which reduces flow volatility,” the report said — adding that it also offers the promise of instant settlement and increased transparency, given the use of blockchains to record transactions. 

“The new products’ ease of access, shorter settlement times and their promise of lower costs are attractive features that could take some business away from incumbent [funds],” the report said. 

At the same time, the products could also lure new investors to the asset class, it noted.

 “They are likely to appeal in particular to investors that actively manage their cash, including retail investors using digital investment platforms,” the report said — adding that this could attract more retail investors in Europe, where money market funds are largely the purview of institutional investors.

“Money market ETFs may initially grow at a faster pace than tokenized MMFs because they use well-established regulatory and operational frameworks that will be familiar to a broad range of market investors,” it said — whereas tokenized funds are likely to be more niche, at least to start. 

“They will at first primarily attract more specialized investors with an understanding of the risks arising from their technological infrastructure,” it said. “However, tokenized MMFs could outpace money market ETFs in the long run as they scale up and deliver promised reductions in transaction costs.”