New Money Market Fund Rules May Change How Investors View a Broad Range of Short-Term Instruments, Says Market Vectors’ Fran Rodilosso

The new money market fund rules recently announced by the SEC may lead investors to change how they view a broad range of short-term instruments, including what has been thought of as their “lowest risk” investments, according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.

Rodilosso notes that once the rules are fully implemented in about two years, the prime money market funds could fluctuate in value and could have restrictions on redemptions. As such, they no longer may have the same value or function as pure liquidity mechanisms. By the same token, Exchange-Traded Funds (ETFs) and mutual funds that are short duration and feature high credit quality may look comparatively more attractive.

“These changes are likely to introduce a broader role for some instruments,” Rodilosso said. “ETFs could stand to benefit from lower transaction costs relative to traditional mutual funds. The downside, however, is the potential of ETF share prices to diverge from net asset value. Different solutions may address different concerns, but it’s unlikely that a single solution will work for all investors.”

Rodilosso points out that the two-year window for the implementation of the money market fund rules may potentially overlap at least in part with the beginning of a rate hike cycle by the U.S. Federal Reserve (the “Fed”). “When that cycle does begin and the Fed starts to push rates higher, the demand for short and very short duration instruments will likely be even greater than it is today,” the Market Vectors fixed income portfolio manager said. “Of greater concern is the potential for a hard turn in the credit cycle, similar to what happened six years ago. This could force some aggressive selling of the riskier money market funds.”

With all this in mind, Rodilosso thinks it is best that investors remain diversified. “It is a little scary to think that some money market funds can become liquidity traps, but that is what happened during the financial crisis,” he said. “Remaining diversified among asset classes may protect investors from risks they may not anticipate.”

Rodilosso continued, “That’s not to say one should avoid risk entirely, in fact there can be some potential benefit of mixing in some credit risk as well as some emerging markets risk, but this should be as part of a diversified fixed income portfolio. As for a short duration component, mixing floating rate notes and other short duration investment grade bonds still makes sense to me as well.“

Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHYTM), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), International High Yield Bond ETF (NYSE Arca: IHY®), and Renminbi Bond ETF (NYSE Arca: CHLC®). As of June 30, 2014, the total assets for these ETFs amounted to approximately $1.6 billion.

Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ©2014 Van Eck Global.

About Market Vectors ETFs

Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $24.8 billion in assets under management, as of June 30, 2014, making it one of the largest ETF families in the U.S. and worldwide.

Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.

The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict, and social instability. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. The Funds may be subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities, as well as concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.

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