Money Market ETFs In Focus: MINT vs. GSY

by on March 20, 2012 | ETFs Mentioned:

ETFs have become popular tools for constructing long-term portfolios, with more and more investors utilizing these vehicles as tools to accumulate wealth over the long run. While the bulk of ETFs out there have appeal as securities that can potentially appreciate by a significant amount over an extended stretch, it’s important to remember that not all ETFs are designed to contribute meaningful long-term gains to portfolios; some are created with an emphasis on capital reservation and lowering overall volatility.

Money market funds continue to be widely used, and while these funds probably won’t make you rich they can certainly serve as valuable defensive tools when uncertainty resurfaces in the market. This asset class offers investors a low-risk source of yield by diversifying their holdings in a variety of short-term securities, including commercial paper, Treasury bills, and certificates of deposit [see Bond ETFs For Every Objective].

There are also now a handful of exchange-traded products that offer exposure similar to those of traditional money market funds, focusing on very low risk securities with the goal of minimizing volatility and preserving capital. “Money market ETFs” are appealing for two simple reason; first and foremost, these products generally offer higher interest rates than bank CDs, especially in the current low-rate environment. Second, they also charge far lower expense ratios than comparable money market mutual funds. With half a dozen products to choose from in the Money Market ETFdb Category, some investors are likely wondering which of these offerings suits their needs best.

Below we take an in-depth look at two popular money market ETFs available to investors. Although these funds may appear virtually identical at first glance, a closer look under the hood reveals some noteworthy differences [see Money Market ETFs Realtime Ratings].

MINT vs. GSY

The common ground between the PIMCO Enhanced Short Maturity Strategy Fund (MINT) and the Guggenheim Enhanced Ultra-Short Bond ETF (GSY) is that both are actively-managed funds. Aside from product structure however, these seemingly identical products offer varying risk/return profiles:

  • Expenses: From a cost perspective, GSY takes the cake. The Guggenheim ETF charges 0.27% in expense fees, which falls in line with the average cost of money market ETFs; MINT on the other hand features a steeper price tag at 0.35%, falling towards the expensive end on the cost spectrum. Considering that the expected yields are generally very low, that difference could have a significant impact on bottom line return.
  • Duration and Credit Quality: Both ETFs focus on short-term, investment-grade debt securities. MINT holds a portfolio made up of nearly 450 securities with an effective duration of 0.78. GSY holds less than 20 securities, although it makes a significant allocation to cash, giving it an average duration of only about two months. In other words, GSY has a much shorter duration than MINT, meaning lower interest rate risk and sensitivity to changes from the Fed [see Bond ETFs That Steer Clear Of Interest Rate Risk].
  • Yield: Both ETFs offer monthly distributions, although the respective yields vary just like the expenses. GSY had a recent 30-Day SEC Yield of 0.26%, while the more expensive MINT featured a 1.07% yield. That isn’t surprising given the difference in duration (i.e., interest rate risk); GSY features lower risk, and therefore has a lower expected return.

The verdict: despite an overwhelming number of similarities, these two ETFs certainly aren’t identical. While both are extremely low risk (and both offer relatively low yields), GSY is positioned a bit lower on the risk spectrum by maintaining an extremely short duration. MINT takes on a bit more interest rate risk, and has a bit more yield to show for it. Of course, both ETFs maintain considerably less risk than the vast majority of bond ETFs, including short-term Treasury ETFs such as SHY. The differences in risk and return are minimal in the big scheme of things, but potentially significant to investors operating in the low credit risk / low interest rate risk quadrant of the bond universe.

Which of these ETFs (if any) is appropriate for your portfolio depends on individual circumstances; those looking simply to preserve the nominal value of their investment might find GSY to be a more useful tool, while those comfortable taking on a bit of extra risk might prefer MINT.

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Disclosure: No positions at time of writing.