How do money market ETFs work?
Money market ETFs track the overnight rate — the interest rate at which the largest financial institutions lend to each other for one day. This rate is set by or closely follows the central bank policy rate.
For sterling funds, the benchmark is the Sterling Overnight Index Average (SONIA). For euro funds, it is €STR. For US dollar funds, it is the Secured Overnight Financing Rate (SOFR).
The ETF holds a rolling portfolio of short-dated instruments. As instruments mature, the proceeds are reinvested. The yield you receive is essentially the overnight rate minus the fund’s total expense ratio (TER) — typically 0.05% to 0.20% per year.
Distributions are paid monthly or reinvested (accumulating share classes), depending on which share class you choose.