Worth the risk?

Matthew Garrott, manager of investment research at Fairway Wealth Management in Independence, Ohio, isn't so dazzled. He points out that for an investment of $1 million, that difference amounts to about $5,000 over six months. He's not sure it's worth the risk. "If you have to think to the right of the decimal, is it really worth it?" he says.

To be sure, money-market funds, which have $2.5 trillion in assets, are still the preferred parking spot for cash. For now, most investors will choose the implicit guarantee of a steady net asset value -- a dollar in generally equals a dollar out -- over a better, but still-paltry, return. Even so, some experts believe that ETFs like MINT are a viable alternative to money-market funds, which have been under scrutiny recently. Policymakers, led by Chairman Mary Schapiro of the Securities and Exchange Commission, say money funds are prone to investor runs and, because of their size, are a liability to the financial markets.

"Investors treat shares in a money-market fund like a checking account, but that doesn't mean shares are actually worth a dollar, and when they go below it's a problem," explains Darrell Duffie, Dean Witter distinguished professor of finance at Stanford Graduate School of Business. When the Reserve Primary Fund infamously broke the buck in September 2008 (which meant investors lost their principal), the government issued a $3 trillion guarantee of money-fund assets. That guarantee has since expired, but Duffie says that the notion that the federal government will step in if a money fund breaks the buck is a fallacy that provides investors with a false sense of security and could also cause the funds themselves to take on undue risk.

In 2010, the SEC tightened restrictions on money-market funds, and Schapiro is now lobbying for more reform, which could include scrapping the stable net asset value or requiring issuers to keep capital reserves and impose redemption restrictions. Those changes could further drive demand for near-cash ETFs, says Duffie, who is a former member of the iShares board and member of the Squam Lake Group, which is composed of more than a dozen prominent economists calling for money-fund reform.

Reform or no reform, rising interest rates could further bolster these ETFs' popularity. "If rates rise, the mean return will increase," adds Duffie. "Something like a MINT will always offer a higher return than a money fund, even if rates go up."

Then again, says Sullivan, once money- market funds offer some kind of return, investors may not be so desperate to pick up yield. If given the choice between earning a 1% risk-free return and a 2% return with some risk, he thinks most investors will go for the former. Of course, given the current economic outlook, "I don't see that happening anytime soon," he says. "I think these exchange-traded funds will be in business for a while."

Cash alternatives
12-month yield

Guggenheim Short Duration Bond (GSY)
Actively managed, invests primarily in short-term investment-grade securities
iShares Barclays Short Treasury Bond (SHV)
Passive ETF tracks an index of U.S. Treasuries with remaining maturities of one to 12 months
Pimco Enhanced Short Maturity (MINT)1.02%
Actively managed, invests in a variety
PowerShares VRDO Tax-Free Weekly (PVI)0.45%
Passive ETF tracks index of tax-exempt, variable-rate municipal bonds
SPDR Nuveen S&P VRDO Municipal Bond (VRD)
Passive ETF tracks index of tax-exempt, variable-rate municipal bonds
These ETFs aim to mimic the short-term, highly liquid nature of money-market funds. Many offer more attractive yields. But they aren't subject to the same stringent rules that money-market funds are, and you could lose some of your principal.

Source: Morningstar -- Data as of July 10

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