A small Texas bank is trying to reinvent the money market fund for a new era, but financial advisors may take some time to warm up to the idea. Texas Capital launched a Government Money Market ETF (MMKT) in late September, taking aim at an asset class that has boomed since the Federal Reserve began hiking rates in 2022. Total money market fund assets have ballooned to more than $6.5 trillion, according to the Investment Company Institute. The firm’s theory is that the increased liquidity of an ETF relative to traditional money market funds will be attractive to money managers, especially with accounts that don’t allow margin trading. Traditional money market fund transactions take place at the end of each trading day, while ETFs trade constantly during market hours. The ETF will also be more transparent than traditional funds because it will disclose holdings daily. But some financial advisors told CNBC that stability is a top priority when using money market funds, not liquidity, which could create hesitation in taking up a new type of fund. “It might be more relevant for day traders and people that are really doing stuff in a quick fashion, but most money managers and financial advisors are pretty long-term oriented. … A day isn’t really going to make a difference,” said Michael Carbone, wealth manager at Eppolito Financial Strategies in Chelmsford, Mass. After a little less than a month, the fund has about $40 million in assets, according to FactSet. That’s not bad for a relatively small ETF company, though basically all of its inflows came within about two weeks of launch. Many financial advisors are also restricted from buying new funds until they are approved for use by their affiliated brokerage or major wirehouses. How it works The Texas Capital ETF holds very short-term fixed income instruments, similar to traditional money market funds. It will abide by rule 2a-7 , a U.S. Securities and Exchange Commission regulation that governs the liquidity of holdings in traditional money market funds. One key distinction is that the Texas Capital fund is not designed to have a stable net asset value. Many traditional money market funds are designed to always trade at $1, which is why a decline to “break the buck” by one fund in 2008 caused chaos in financial markets. “My concern is, of course, the fact that not only can it go up in net asset value, it can also go down,” said Richard Leimgruber, private wealth advisor at Onyx Bridge Wealth Group in Tarrytown, New York. So far, the Texas Capital fund has traded between $100.01 and $100.36 per share since launch, according to FactSet. The deviations can be caused by trading patterns or the timing of distributions. Another thing for individuals to consider is that using an ETF instead of a traditional money market fund could change the fees they owe to a financial advisor. Some advisors do not consider the cash assets like money market funds when assessing their fee base, but the ETF may fall into a different category. Looking forward The potential market for a money market ETF is massive. There are more than $5 trillion in government money market funds, according to the ICI. The Texas Capital ETF has an expense ratio of 0.20% and a seven-day yield of 4.74%, making it competitive with many major funds in the space. “If it turns out not to have other hidden risks or positions that would make it more risky in certain circumstances, then it really could be an interesting option. I don’t know if it is the kind of liquidity that a typical retail investor requires,” said Jeff Schwartz, president at fund research and investment analytics provider Markov Processes International. One additional area where the ETF may find a receptive audience is in model portfolios or fund-of-fund strategies that favor ETFs. Brad Roth, chief investment officer at Thor Financial Technologies, said his firm uses short-term Treasury bill ETFs as a proxy for money markets in their strategies but would be open to shifting to something like the new Texas Capital fund. “We’re always looking at separate alternatives as a possibility,” Roth said.
