The last week has brought up some VERY basic questions.

With Matt now travelling and generally busy, you may need to
get ready for a steady blast of me…though maybe we could get Murray or even
Trader Don to step in here with some bluster. Speaking of Mr. Friedman, he had
mentioned maybe we should hedge our bets with the company bank accounts in the
face of last week’s meltdown.

We’ve already drawn down our Washington Mutual account &
even the main one, Bank of America, which is a buyer in this market – was
making him nervous. If you want to
REALLY get nervous, start looking at and thinking about your likely wildly
underperforming money market sweep account.
THAT really IS at risk as the news in the last week has made clear.

My question is WHERE ARE ALL THE ETFs that promise no loss
of principal and steady income at the minimum fee? That is one area it just feels like ETFs have
been lacking in. At one point last week,
treasuries I believe were down to zero on yield as money searched a safe
haven. And bonds by their nature move
around on the yield curve. What if you
just want INTEREST and ZERO risk?

I got this from an IU.com reader discussing the point. And
maybe it will lead to more and better ETFs stepping in to provide more transparency,
good yields and lower costs. He mentions the treasury funds out there, plus the
new WisdomTree fund. The currency
products are close…but of course you’re also buying the currency direction. ETF industry – any thoughts on this? Seems
like an obvious area. I really ought to move my sweep account, which is a JOKE -
and an unprotected joke at that – into one of those funds. Here’s the note from
our reader:

With all
that’s going on, any of you stirred at all by developments on the money market
fund side of the world?

The ETF/ETN industry has done a poor job on the ETN front — It
didn’t have go that way, but it did. And the ETF industry has also
(completely) dropped the ball in relation to needs associated with cash and
money market alternatives. This is one of a few very important areas
where the ETF industry has been quite slow and reactive rather than
clear-minded and proactive.

Need for innovation and education on the cash and money market
front have always existed but has clearly taken on added
importance since universally non-transparent money market funds began
incurring losses last September. The fact that
increasingly-strained issuers consistently covered principal losses in money
market funds over the last 12 months, combined with a fundamental lack of
understanding on the part of the investing public and the media, kept the
brewing problem from becoming major headline material or from maintaining any
story-line shelf-life.

Isn’t it absolutely incredible that on any given day an owner in a
money market mutual fund has no way of reviewing exactly what the fund
holds — that reporting on holdings in these funds is, by regulation, allowed
to be only quarterly and a quarter in arrears at that? … Meaning that
the information is always stale by at least three and up to six months?
… On portfolios that likely have duration well under six months? And
there’s nothing wrong with this picture?

Traditional mutual fund money market assets ballooned to $3.5
trillion (by 40%+) in the 15 months through July 31. Any thoughts on how
average credit quality might have evolved over that period? With assets
growing by one trillion dollars and given the “credit crisis” that
has been unfolding? Why are ETF sponsors so focused on niche plays when
there is plenty of heavy lifting and incredible, untapped opportunities
associated with the addressing real and broad-based needs? Investors
need fully transparent alternatives to traditional money market
funds. Attacking proactively, on the part of ETF sponsors, would have
meant rolling out both products and aggressive educational programs last fall (where
the education really does the marketing – just as in other areas of true
innovation for ETFs). Come on! Lets get this part of the program
into shape! So far the ETF industry gets a D- on work done in the money
market fund alternative arena (and that’s being quite charitable).

In the “for what its worth” column, I started migrating
“cash” (or, more correctly, very short-term fixed income) residing in
single treasury holdings (mostly 1 or 2 month zeros) to BIL a few weeks ago as
the treasuries mature.

+++++++++++++++++++++++++++++++++++++++++++++++++++++

In another email:

For relatively large
client cash positions, I long ago pitched traditional money market mutual funds
into the trash bin. Risk trade-offs for incremental yield are wagers that
would be better-placed and much more clearly discernable elsewhere.

Depending on size of
cash holdings and liquidity needs, I’ve been using a combination of CDs and
treasury zeros to cover the asset area (not the most efficient or graceful way
to cover the need). The intended objectives for the holdings, capital preservation
(inclusive of credit risk and balance-sheet induced issuer-related liquidity
risk) and a positive yield, could just as easily be addressed via a money
market “type” of ETF, as I’ve suggested, provided there’s enough meat on the ETF’s
bones so that my clients aren’t representing a significant portion of trading
volume and net asset holdings (I don’t care how sound the construction is, I
just don’t ever, ever want for a client of mine to have a sizable proportion of
his/her holdings in an instrument where his/her personal stake also happens to
represent a significant share of trading volume and/or open interest in the
instrument — right or wrong, that’s a “sleep at night” issue for
me, personally).

In the very near term
it would appear that reasonable ETF alternatives (i.e., those having reasonably
healthy trading volumes and net issuances) would include only BIL and (perhaps
stretching it a bit) SHV. These both are, admittedly, purely treasury
plays — meaning they’re likely going to have a lower yield (and, at least in
the case of SHV, a volatile total return – since it has a more variable NAV)
than a more diverse set of issuers via an ETF seeking to function like a money
market fund in the ETF space (while hanging on to a robust quality profile).

Getting to a purely
ETF play to address needs in this area of the allocation seems still to
be limited, as a practical matter, to a half-baked (or mostly baked?)
solution with BIL (or, stretching it, with SHV).

— Fair
assessment? Are there other angles and other ETFs that I’ve overlooked?

+++++++++++++++++++++++++++++++++++++

Another Email With another Money
Market Alternative:

Can I get USY creation / redemption history from
Wisdom Tree? — I know that its been light (only one trading day had a
creation unit of volume trade). If not, can you let me know where I can get it?

Do you have any white
papers in any way related to the U.S. Current Income Fund (USY)?
If this thing were generating any meaningful volume
and had any meaningful experience in creation and redemption activity, I’d be
moving clients’ straight treasury holdings (single, short-maturity treasury
zeros that I’m using for any material cash holdings for clients — in lieu of
traditional money market mutual funds) to the ETF.

But I’ll never put my
clients in the position of being one of the first to drive a new car out of the
lot.
You all ought to be beating the drum on this one
pretty hard. Simply point out to people the truth — start with the number of
traditional money market mutual fund issuer bailouts since last September (what
is it now, 16 or 17? … totaling more than $6 bln???) along with the lack of
holdings transparency by these funds combined with money market fund managers /
issuers routinely b.s.-ing investors regarding the
true nature and cleanliness of money market fund holdings [leaving investors to
learn through the media (!!!!) of surprises in holdings] — We’ve seen
precisely this story play out (at least) several times since last September
(transparency – or lack thereof – is or ought to be a huge, huge issue in this
arena and it really needs to be made so in related marketing and education
strategies). Combine that with the fact that assets in traditional money market
funds have swelled by roughly 40% in the last 15 months (and has average credit
quality of short-maturity instruments improved over that period? — not very
likely). This is where the value is (or, rather, can be) with this type of
fund.

I (or, rather, any
client of mine) won’t be a guinea pig so please, get some institutional
heavy-weights to participate in USY and get some net issuance,
creation/redemption activity and trading volume momentum in this thing — and
get louder about it to simply wake people up. While the “truth shall set
you free” mantra might not be the precise language that applies here, the
real truth in this domain can certainly serve to help protect and grow assets.

And a comment about
the prospectus — a bit light on info regarding the holdings landscape for the
fund.
I understand that ssga will be out with a similar fund
shortly — I haven’t seen the prospectus yet. I actually think that theirs
hitting the street should be good for USY as well. It’s a very big (and poorly
tilled) sandbox and the first (legitimate) four or five ETF sponsors to the party
should do extremely well and two or three names in the game will better stir
the pot for the bloated $3.5 trln “corner” of the market.

+++++++++++++++++++++++++++++++++++++++++

I feel rather
strongly that ETF sponsors are missing important opportunities to address real
and significant industry needs on a number of fronts. In some cases, as
with USY, its not about creating a new index and ETF to address a particular
need but, rather, simply “putting the pedal to the metal” on public
education and marketing where it most definitely ought to be done. I’ve
got no problem with the creation and marketing of an expanded menu of niche
products – as, perhaps, 90% of 2008 industry issuances could reasonably be
classified. But your firm has USY running now for roughly three months
and, yet, I’d be willing to bet that less than 15% of serious ETF practitioners
are even aware of its existence, let alone its merits as a reasonable
alternative to traditional money market mutual funds. I think that its
absolutely insane that the ETF industry hasn’t aggressively gone after the
non-transparent, bloated $3.5 trln money market segment. My comments to a
couple of your colleagues can be found at the bottom of the string, below.

As a side note, Don had added that I had forgotten to
mention his long position (is there any other kind these days?) in one of the
Homebuilders ETFs – help me out, Don, is it XHB? He’s up. There, Don, do you feel better now?

Last 5 posts by Jim Wiandt

• FINRA Warns On Leveraged ETFs - June 19th, 2009
• What is Wrong With Matt Hougan? - June 16th, 2009
• ProShares, Direxion Are NOT ETFs - June 16th, 2009
• Shock And Awe - June 12th, 2009
• ETFs Are A Scam? - June 10th, 2009