The answer to the massive bond funds outflow: a USD cash ETF ?

In this current rising interest rates (or at least, the coming anticipated rising interest rates, courtesy of ‘The Fed Taper’) market landscape, fund outflows from bond funds as well as other yield instruments may be on a one-way ticket – they ain’t coming back.

As Bond Market Tumbles, Pimco Seeks to Reassure Investors

As investors prepare for a long-term shift in interest rates, few large financial firms are as vulnerable as the giant money manager Pimco.

Over the last 30 years, the company has been one of the biggest beneficiaries of steadily falling interest rates, which have made bonds, and Pimco’s trademark bond mutual funds, into star investments. The environment propelled Pimco’s transformation into the fifth-largest asset manager in the world, landed it in many retirement plans and gave its leader, William H. Gross, an aura of invincibility.

Now, as interest rates have surged in the last two months, the company is showing several signs of stress.

Three-quarters of the company’s popular exchange-traded funds have experienced outflows during June, with two of them losing nearly 40 percent of their holdings, according to data from Lipper. At the same time, nearly 70 percent of Pimco’s mutual funds and E.T.F.’s have been underperforming their benchmarks, data from Morningstar shows.


But with the traditional outflow destination markets of equities and alternatives/commodities looking either iffy or bubbly, where can several hundred billion dollars go?

Perhaps, to cash?

An E.T.F. Too Far

Exchange-traded funds are taking over the financial world. At last official count, there were nearly 1,200 of them at the end of 2012, compared with about 100 a decade ago, according to the Investment Company Institute trade group. With a new issue now linking to the virtual currency Bitcoin, the $1.3 trillion index tracker industry seems to cover nearly everything. And yet the most important asset class of all has been ignored. Breakingviews stands ready to remedy the situation.

The first E.T.F.’s were created to track the performance of broad market indices. Two decades on, there are E.T.F.’s that offer exposure to Mongolia, combating global warming and even, in a way, garbage. There are E.T.F.’s that invest in other E.T.F.’s. And if the Winklevoss twins of Facebook fame get their way, it will soon be possible to trade shares that track the value of bitcoins.

Putting aside the question of whether a bitcoin E.T.F. shouldn’t really be priced in bitcoins, this addition to already breathtaking diversity makes it all the more surprising that no such fund caters to the growing group of extremely risk-averse investors. Tapering talk means more of them want to wait out the storm by rotating back into cash. Here, the E.T.F. whizzes have let them down.

The Breakingviews Dollar Trust should calm their nerves. This Hades-on-Winter-registered security will hold United States dollars in a segregated custody account and issue shares that aim to reflect the performance of the underlying asset – minus expenses, of course. Its sponsor is Greenback Reserve Electronic Exchange Distribution, which controls the proprietary technology needed to manage the assets.

As a defensive investment, this trust is unlikely to suffer from the market dislocation that has recently afflicted more speculative E.T.F.’s. And by holding what is arguably the world’s most liquid asset, it avoids the liquidity mismatch regulators fear is a feature of some of the funds. The Breakingviews Dollar Trust will quite literally be as safe as keeping cash in the bank. Owning it will now be as easy as buying and selling a stock – and for only a fraction of the typical management fee.

The writer of the second article was writing entirely tongue-in-cheek. He presented the idea of a cash ETF simply as an ironic counterpoint to the recent news of the Winklevoss twins coming up with their bitcoins ETF.

But of course, in this modern financial world, anything can be replicated. For those who do wish to take a position on USD without opening a USD bank account, you can always go long USD Index futures or even simpler, just buy the UUP (PowerShares DB US Dollar Bullish Fund).


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