While short-duration funds have been all the rage lately in fixed-income ETFs, only one so far invests like a real money market -- the WisdomTree U.S. Current Income Fund (NYSEArca: USY). But at least one other is on the horizon and industry observers believe more are on the way.

None of these funds, however, will be able to call themselves actual money markets just yet. That's a fact that may keep investors away, as the term "money market" implies a level of security that most have come to expect. At stake is some $3.5 trillion in assets now parked in money market mutual funds.

Bean-Counting Dilemma

At the crux of the issue is compliance to the Investment Company Act of 1940, and more specifically, to Rule 2a-7. The regulation governs what is and is not a money market fund -- what it can and can't invest in as well as the risks it can take.

Rule 2a-7 also allows for certain accounting procedures that make daily record keeping possible through a mutual funds structure to keep NAVs at stable values. Most money market funds, after all, are launched with a NAV of $1/share-a value that never budges over time. There is an implicit guarantee from the fund company that the funds will never 'break the buck'; that is, that the fund company will make safe enough investments that the funds' value will never dip below the set $1/share.

With an ETF's unique creation and redemption process, avoiding breaking the buck has become an accounting nightmare, says Peter Crane, president of Crane Data LLC.

"Right now, ETFs are beginning to hover around the edges of money market mutual funds," he said. "But they're not the same thing as money market mutual funds. The seeming simplicity of maintaining a stable value is actually a formidable obstacle for the ETF industry."

Still, others argue that differences in names won't prove to be that much of a roadblock. "Not being allowed to call an ETF a money market fund just means that people will have to refer to them as money-market-like ETFs," said Kathleen Moriarty, a partner at Katten Muchin Rosenman.

The New York-based lawyer was involved in the creation of the first ETF, the SPDR Trust (AMEX: SPY) and consults fund providers as well as government agencies around the world on ETF regulatory issues.

She points out that the SEC adopted Rule 2a-7 to remain consistent with other regulatory moves to keep ETFs and mutual funds as distinct and separate products. "Not being able to call an ETF a mutual fund -- even though both are basically big baskets of stocks -- hasn't hurt the ETF industry at all," Moriarty noted.

Too Early To Tell?

The naming issue and stable value equation hasn't made much of a dent so far in the NAV of the WisdomTree U.S. Current Income Fund. The ETF came out in May, and its portfolio has an effective duration of about 20 days. But its weighted average maturity, which doesn't count dividends, is 14.93 days.

"Those figures make USY seem like a money market fund. But diversity and quality of the securities are other criteria necessary to consider a fund a true money market," Crane said.

Besides commercial paper, the fund can also invest in such high-quality securities as short-term Treasury bills and notes.

In fact, WisdomTree on its Web site says: "Although this fund invests in very short-term, investment grade instruments, the fund is not a ‘money market' fund and it is not the objective of the fund to maintain a constant share price."

State Street Global Advisors has filed to launch what appears to be another ETF that would have duration and credit-quality characteristics of most money market mutual funds. The SPDR S&​P Commercial Paper ETF plans to purchase investment-grade securities with 31 to 91 days in maturity, according to its filing.

"This should be a true money market -- or as close as it gets -- in ETFs," Crane said. "There have been others launched recently, but most of them are really enhanced cash, or ultra-short, bond funds."

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