Function
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Money market ETFs are a type of fund that puts money into short-term debt securities. These funds regularly invest in T-bills, commercial paper and CDs. This is the same basic principle as a regular money market fund, except that it trades on the stock exchange. Many investors use this type of fund as a way to invest extra cash and earn a nominal return on investment when they do not have any other investments in mind.
Benefits
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The benefit of this type of investment is that it is highly liquid. You can buy or sell shares anytime you want. With mutual funds, you have to wait until the end of the trading day to buy or sell shares. Another benefit of this type of fund is that the interest rates are higher than what you could get from a certificate of deposit or a savings account.
Drawbacks
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Even though you can earn a higher rate with a money market ETF than you could with a savings account or CD, the rates are still fairly low when compared to other forms of investment. If you put your money into a traditional mutual fund or ETF, you could potentially earn a much higher rate of return. This means that the opportunity cost of investing in a money market ETF is high.
Safety
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Investing in a money market ETF is considered to be a very safe form of investment. The investments that these funds choose are very low risk and do not have much of a chance of going into default. For example, many of these funds invest a large portion of their money into T-bills. T-bills are guaranteed by the U.S. government, so as long as the government is in existence, these T-bills will be safe.
Considerations
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This type of investment also has some expenses that you will have to deal with. When you buy or sell shares, you will have to pay a commission to your broker. The fund also charges a management fee. These fees can eat into your small returns and make the fund a less attractive option.
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