Late last month, Crane Data hosted its big Money Fund Symposium conference in Jersey City, where over 740 money market professionals discussed rates, tokenization, record asset levels and a number of other hot topics in cash. Below, we quote from the session, "Money Market & Ultra-Short ETFs," which featured Bob Cousart of BlackRock, Jon-Luc Dupuy of K&L Gates and Jerome Schneider of PIMCO. Cousart starts off, stating, "So, unlike short-duration ETFs, money market ETFs adhere to the strict regulatory guidelines of 2a-7, capital preservation and liquidity. So having that little '2a-7' stamp, that does mean something for certain investors who want to have that sense of safety.... Money market ETFs really round out that broad spectrum of fixed income ETFs, serving as a kind of a bookend for the whole broad spectrum." (Note: This article is reprinted from the July issue of Bond Fund Intelligence, which was published on July 15. Contact us at info@cranedata.com to request the full issue or to subscribe.)
Asked about ultra-short ETFs, Schneider responds, "Pimco's approach to the ETF complex has been one which has been driven by a view of active management from the very beginning.... We recognize also the fact that there are opportunities, and we launched about 3 1/2 years ago, a T-bill ETF, called BILZ.... You can actually manage T-Bill portfolios that effectively have money market-fund-like qualities. While we don't necessarily label it as money market fund ETF, it's done a [nice job] of engaging advisors and models.... But that active management theme has been something that Pimco has really been consistent with throughout its evolution of ETFs over the years. More recently, [we've had] more wholesome and full-throated type of approaches to our income-based strategies. What I think is interesting is that this is an evolutionary discussion, and it's really philosophical."
He comments, "Our job is to continually evolve and evaluate potential, both in terms of the opportunity sets in the market, but also in the problems that need to be resolved.... The evolution that we found coming out of the financial crisis was finding high-quality solutions that provided income to clients while still having a defensive mentality of capital preservation.... It's great that that universe has expanded to a lot of different competitors ... and we've seen tremendous growth of 14 to 16% annualized over the past 2.2 years in those arenas. [T]he discussions that we collectively have been having with investors about how to think about capital preservation have been resonating for that period of time. And that's a great thing that the ultra-short universe has been able to do. So, from that point of view, the ETF landscape, the ultra-short landscape, and the step out of money market funds will continue to evolve, because it has the ability to differentiate itself in terms of structural opportunities for those investors."
Schneider says, "As we get into this environment of rates that are perhaps sticky, maybe going lower, maybe going higher, ... inflationary pressures are effectively turning what were relatively attractive nominal cash yields into negative real returns pretty quickly here.... That's really been a common resonating theme, which has driven ... more flows into the ultra-short universe over the past 12 months."
Discussing money market ETFs, Cousart says, "It's its own sort of animal. You know, the idea here is not to cannibalize any of the existing short duration or ultra-short ETFs that we have out there. One of our couple biggest ones, ICSH, continues to do well. We very much look at the money market ETFs as a separate entity.... Over time, we expect or hope to see more of the AUM come into the money market ETFs. But it's a separate investor base from the ultra-shorts.... We do view them separately, and there's futures for both."
Asked about restrictions on and definitions of 'ultra-short,' Schneider responds, "The way we think about it, and the way investors and advisors think about it, is recognizing that while you have permissions within a landscape, it doesn't mean that you're running full throttle on those permissions the entire time. Your choice of a manager is one who uses prudence and practicality combined with resources. As opposed to just simply running the full gamut of risk at all points in time. And there's a whole variety of different approaches in this.... That's why you have strategies which tend to go down the credit spectrum or tend to add a lot of duration or do a lot of different things that are more liquid and less transparent. The way we think about it functionally is that when you take those steps, recognize that there are influences which are obvious, Fed policy, liquidity within the market, seasonality. But there's also things which are less transparent: credit research, which is more than just underwriting commercial cases; understanding global market liquidity as opposed to just what goes on here in the United States; understanding that there is a variety of flows that are influenced by retail flows, but also institutional flows which might coagulate and create different opportunities at different points in time."
Schneider tells us, "So, these are real discussions to be had within the landscape. It creates a sort of tiered, bifurcated approach in this. Now, the ETF landscape has nuances, and when you talk about regulatory reasons, the ultra-short landscape typically runs between zero and one-year duration.... No one's getting maybe a lot of money off of a one-year duration bet at this point in time. At the same time, the way we would think about it at PIMCO is you shouldn’t be either, and there's structural opportunities that don't necessarily predicate us betting on whether the Fed's going to hike at the next meeting or cut later in '27. The reality is that there's a lot of people who still do that, and we would shy away from that. Not because we don't have a view at PIMCO of what the outlook is going to be -- we definitely do, which is effectively we're going to be on hold for [a long time here], but followed by cuts."
Schneider states, "But the point is that the different opportunity sets allow us to evolve the portfolio. So, as an example, MINT, in our ultra-short landscape, or LDUR, low-duration portfolio in the short-term landscape, is a one-to-three-year benchmark. The benchmarks are there to provide duration guidance. The opportunity sets are to evolve what types of assets you can create to diversify portfolios, if that's a consistent thing. So, the ability to do financial and non-financial commercial paper, asset-backed securities, corporate bonds, SSAs, whatever the landscape is.... What we think is quality, but also the ability to earn proper premiums, liquidity premiums."
He adds, "And we're going to rotate the portfolios in real time to do that. So, long story short, is there's investors looking for answers to lower their volatility profile because their other incumbent assets are increasing in volatility profile, and that puts you in more of an income generation approach. Now whether that means you go to cash and cash like in terms of like ultra-short or short-term strategies, perhaps. But it also just means you might find yourself in the fixed income universe ... especially coming from an underweight of fixed income for decades and frankly a whole universe of investors who don't even know what fixed income is for the most part. So that puts Bob and I in a unique position of trying to educate people over the next decade or so."
Finally, Schneider adds, "At the same time, to answer your question [about flows being inside-out or outside-in], I think we're at a cross current. One, there's a functional aspect of people who are ultimately faced with thinking that cash yields, which they've gotten so accustomed to at 4-5%, could be going away in the next year or two. It could be 2%. That might not seem attractive in a 3% inflation environment. That's one aspect. And the other aspect is rates may go higher.... They might go higher by 25 bps, 50 bps, but you're still going to be able to outperform cash in many ways in this regard. And so, what we'd ultimately say at PIMCO is you can effectively get equity-like returns with fixed income-like assets. So, earning 5-7% [with a] very low volatility profile should be more attractive now than it's been in a generation. So, I look at the beautiful prairies and the great plains of opportunity and say, 'it's great.' There's a lot of winners, but there's also going to be losers. That uncertainty is making investors and advisors ask a lot more questions about potential outcomes than they have for a long time."
