What are money market ETFs and how can you invest in them?

What are money market ETFs?

A money market ETF invests in short-term and typically low risk securities with an aim to preserve capital and generate slightly more income than you might earn in a savings account. For context, an exchange traded fund — commonly known by its initialism ETF — is a ‘basket’ of securities that trades on an exchange just like a stock does.

There are hundreds of money market ETFs to consider, but they all share some traits.

They invest in securities including treasury bills, investment grade corporate bonds and commercial paper — all of which are very low risk and short term. They are not designed to generate massive returns; the aim is simply to prioritise capital preservation and maintain sufficient liquidity to meet redemptions, but while also delivering a return that beats keeping cash in a savings account.

Commonly, investors use these ETFs to keep emergency funds, or any kind of capital that you expect to need access to at short notice.

While these ETFs are considered to be very low risk, the value of your investment can still fall. For example, some money market funds sport a variable net asset value, which means that the price per share will change dependent on the market value of the securities they own. And unlike a mutual fund, all ETF market prices change throughout the trading day.

Money market funds originated in the early 1970s in the US, and became very popular as they represent an easy way for investors to purchase a pool of securities that typically generate better returns than keeping capital in a bank account.

Nowadays, they represent a keystone of the financial markets — and are becoming ever more popular in this high interest environment after a long period of sub-1% rates.

How to start investing in money market ETFs with us

You can start investing in money market ETFs using the following steps:

1. Create your live account in minutes
2. Select your IG ISA or Share Dealing Account
3. Research your money market ETF opportunity, and consider how to diversify your portfolio and how to manage risk
4. Invest a lump sum or set up a regular instalment to fund your account
5. Monitor your position

New to investing? Open a demo account to build your confidence.

Please be aware that not all money market ETFs qualify for ISA inclusion. We offer zero commission on US ETFs, and just £3 on UK ETFs, with a foreign exchange fee of just 0.5%.

How do money market ETFs work?

Money market ETFs are designed to offer a safe and stable investment choice, as they invest in low risk securities, backed by excellent credit ratings. Money market ETFs tend to sport returns that are closely aligned to the ‘overnight rate.’

The overnight rate is a higher than usual rate of interest that is only offered to large, prestigious and secure financial institutions, including banks. The rate is based on the base rate set by the central bank within the ETF’s target market — for example, the Bank of England in the UK or the Federal Reserve in the US.

In the UK, the Sterling Overnight Index Average (SONIA) is the interest rate benchmark that reflects the average interest rate that banks pay to borrow sterling overnight.

Interest rates set by savings and easy access bank accounts are also heavily influenced by the base rate but are typically slightly lower than those on offer in the best money market ETFs, as they usually hold several higher-yielding securities a few weeks from maturity.

The key concept to understand is that a money market ETF is almost as stable as a pure cash account and rarely fluctuates significantly in value. This is because of the unique combination of high quality assets and short maturities, which means they are barely buffeted by changes in the base rate.

This may sound like a no-brainer, but it’s also worth noting that ETFs do not qualify for the £85,000 FSCS protection limit that applies to UK bank accounts (the limit is per banking license, not per account). However, money market ETFs are regulated by European Union legislation that ensures your assets are ring-fenced should your ETF provider enter administration.

Of course, these protections are unlikely to ever be needed as history suggests that central banks will always step in to correct any major crisis — and in any event, assets held by the ETF can always be sold if necessary. But it does appear that this additional risk is the price of the increased returns.

As noted above, investors with short-term goals, or looking to invest their emergency fund, or perhaps unsure where to invest their capital in the long term, may find this option attractive.

But these ETFs are also generically popular when interest rates are rising, because longer-dated bond ETFs will suffer capital losses when yields increase. Meanwhile, money market ETFs track rate rises as their assets mature quickly, and they can then reinvest into higher rate holdings.

When selecting a money market ETF, you need to consider the interest rate on offer, the quality of the investments in the fund, and the total expense ratio. For perspective, you can sometimes enjoy a higher rate with a risker fund or higher fees, but this can defeat the purpose of the investment.

Best money market ETFs to watch in 2025

These two money market ETFs are selected for their popularity. Past performance is not an indicator of future returns.

Xtrackers II GBP Overnight Rate Swap UCITS ETF 1D (XSTR LN)

The Xtrackers II GBP Overnight Rate Swap UCITS ETF simply seeks to reflect the performance of a deposit earning interest at the rate of SONIA. At 9 December 2024, it had £75 million of assets under management, and sported an all-in-fee of just 0.1%.

The fund launched in 2007, and is 100% invested in government bonds, with the lion’s share held in GBP, and 86% of assets allocated in the United Kingdom.

Lyxor Smart Overnight Return UCITS ETF C-GBP (CSH2)

The Lyxor Smart Overnight Return UCITS ETF C-GBP is an actively managed ETF which aims to achieve short term returns with low volatility by investing in a portfolio of financial instruments and repurchase agreements.

It also has a total expense ratio of 0.1%, with £705 million of assets under management. It was launched in 2015 and aims to achieve short term returns higher than the benchmark index SONIO.

Pros and cons of money market ETFs

As with all investments, there are advantages and drawbacks to money market ETFs.

Pros of money market ETFs

• Low risk profile — these kinds of ETFs are typically very low risk as they are invested in very high quality assets
• Liquidity — money market ETFs are usually highly liquid, making them excellent for short term investments. They are becoming more popular as earning a good return on a short-term investment is often difficult
• Returns — these ETFs often generate a better return than keeping cash in a bank account
• Contemporary pricing — money market ETFs assets mature quickly, meaning they are constantly buying new assets with more up-to-date pricing
• Diversification — money market funds typically diversify their investments, and an inclusion in your portfolio can help reduce your own risk profile

Cons of money market ETFs

• Accessibility — bank accounts are open 24/7, while money market ETFs are only available when the stock market is open
• Insurance — these ETFs are not covered by the £85,000 FSCS protection but are covered by European-wide legislation
• Timeline — they are not suitable for long-term investments as they don’t offer high capital appreciation
• Sensitivity — while low risk, these ETFs are still subject to short-term interest rate fluctuations as determined by central monetary policy. This can see the value of your investment fall
• Inflation — if the rate offered by the ETF is lower than the inflation rate, then the purchasing power of your capital will fall
• Risk — while very low risk, it is possible for one of the bond issuers or the issuers of the certificates of deposit the ETF holds to default. This is rare, but not unheard of
• Currency — some money market ETFs are based on overseas currencies, leaving you exposed to currency effects (though this can also be positive)

Money market ETFs summed up

• A money market ETF invests in short-term and typically low risk securities with an aim to preserve capital and generate slightly more income than you might earn in a savings account
• Commonly, investors use these ETFs to keep emergency funds, or any kind of capital that you expect to need access to at short notice
• Money market ETFs tend to sport returns that are closely aligned to the ‘overnight rate.’ The overnight rate is a higher than usual rate of interest that is only offered to large, prestigious and secure financial institutions, including banks
• When selecting a money market ETF, you need to consider the interest rate on offer, the quality of the investments in the fund, and the total expense ratio