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Money Market ETF’s – A Brief Explanation to Money Market ETF’s

As interest in ETF’s has skyrocketed, issuers have hurried to expand the scope of products to every conceivable asset in the investment universe.

Many investors have gone past the stage of regarding ETF’s as a supplement to equities and bonds and have now adopted all ETF portfolios and techniques such as ETF Trend Trading. With asset class diversification coming from the appropriate ETF (equities, bonds, currencies, commodities and so on) rather than investing in each of the underlying assets, portfolios are becoming far easier to manage especially for the average investor.

Money market ETF’s now offer investors an opportunity to put their short-term cash to work. These funds invest in a variety of low risk and short-term investments such as certificates of deposit, commercial paper and Treasury bills. The advantages of money market ETF’s are:

-their yields are higher than certificates of deposit

-their costs are lower than money market mutual funds

-they make monthly interest payments

-they offer a degree of diversification which would be well beyond the reach of an average investor

-they offer the tradability and liquidity of equities

The best way to understand how a money market ETF operates is to look at a couple of the more popular ones:

WisdomTree U.S. Short-Term Government Income Fund: this fund, which is actively managed, invests in short-term government securities such as Treasuries and bonds issued by federally sponsored agencies and repo agreements backed by government securities.

Claymore U.S. Capital Markets Micro-Term Fixed Income ETF: this actively managed fund the tracks an index made up of securities with a maturity of less than 12 months such as fixed income securities and Treasuries.

Because ETF’s are such a flexible investment vehicle, you can also invest in ETF’s that are not technically money market ETF’s but provide good short-term and low risk investment opportunities. Two such ETF’s are briefly described below:

PIMCO Enhanced Short Maturity Strategy Fund: this fund is not technically a money market ETF because it invests primarily in investment quality short-term debt securities. The objectives of the actively managed fund is to provide better returns and higher income on the than money market funds.

PowerShares VRDO Tax-Free Weekly Portfolio: variable rate demand obligations (VRDO) are actually long-term floating-rate interest bonds wereon which interest is typically reset every month. Liquidity comes from the fact that the bonds can be sold at any time to an investment dealer.

In addition to the US markets, there are now ETF’s that offer exposure to the money markets of various different countries such as Japan, China, India and Brazil. Developing country money market ETF’s tend to offer higher returns which it is possible to enhance if you handle the currency risk judiciously. You must remember that these are generally denominated in the home country currency and it is also possible to lose money on adverse currency movements.

If you are choosing to invest in a money market ETF, the two things you should study carefully the details of the holdings that make up the investment basket and the costs. You should also remember that some money market ETF’s could be less liquid than others and you may have a problem in trading them actively.

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