Money market ETFs, so short duration reduces price volatility
On very short maturities, ETFs and mutual funds (money and bond) can be effective tools for managing liquidity
3' min read
3' min read
They reward more with rising interest rates. But even in these times of expected falling rates, Etfs (Exchange trade funds) and mutual funds can be effective tools - on very short maturities - to manage liquidity. Etfs and funds can be either monetary or bond in nature. Let us look at the differences.
Money Etfs
.There are 4 Money ETFs on Borsa Italiana (3 passively managed and 1 actively managed). In the case of passive management, the return offered by the instrument will be in line with that of the underlying, while with active management the objective is to seek outperformance against the benchmark. These instruments replicate the trend of the €Str (Euro short term rate) which expresses the overnight rate (i.e. the interest rate with a maturity of one day) applied by some banks in the eurozone.
The €Str rate is linked to the rate on deposits with the European Central Bank: it is therefore subject to the monetary policy choices of the ECB, which when it raises (or lowers) the deposit rate, the €Str will also rise (or fall) by the same amount. Currently, the interest rate is 2.5 per cent per annum, although it is expected to fall by a further 50 basis points by the end of 2025 according to the ECB's cut expectations. This would bring the yield to maturity offered by monetary instruments at the end of the year to around 2% per annum.
The advantages
.The advantage of money market ETFs is the possibility to take a position on the very short maturity rate with practically no duration. This advantage was very relevant from mid-2022 and throughout 2023 when the ECB embarked on the path of raising interest rates to combat rising inflation. For a few moments, these instruments had come to offer a yield of more than 4%, allowing them to take advantage of the inversion of the yield curve.
Disadvantages
.Compared to individual government bonds, however, these products have ongoing expenses that have to be taken into account and may have a major impact on the final return. Another difference to the disadvantage of these instruments concerns the transaction costs that have to be paid both when buying and selling.
