Exchange-traded funds (ETFs) are adaptable instruments used for many purposes. This week we will look at how they can used to provide dependable, decent income.
Money-market ETFs share many of the advantages seen on bank-offered term deposits, but with potentially superior yield. The concept is not new. For decades, investors have been buying unlisted mutual funds that invest solely in market-market instruments.
To get a bit of terminology out of the way, money markets are an essential, but rarely discussed, component of global finance. The market specialises in short-term finance and lets banks, government agencies, municipalities and corporations find the day-to-day liquidity needed to stay up to date on their many obligations and regulatory requirements.
Because the borrowing is short term - the time period for lending can be up to one year, but usually the loan is measured in days or weeks - the risk of default tends to be low. After all, few lenders' creditworthiness will deteriorate significantly in the span of weeks.
Money markets are rarely discussed because they are a bit dull. Apart from periods of extreme stress (such as was seen in 2008, following the Lehman Brothers bankruptcy) money markets tick over with a high degree of reliability. The returns are not exciting, but they are reliably better than bank deposits and, when markets are tanking, dullness can be a virtue.
Money market ETFs can be particularly useful when an investor just wants to put his or her money into a reliable, income-paying fund.
