The much anticipated and long-awaited MacroShares ETFs tracking the S&P Case Shiller Composite-10 Home Price Index will make their debut on April 28th. The bullish MacroShares Major Metro Housing Up (UMM) ETF will seek to deliver three times the cumulative percentage change in the benchmark index while the bearish MacroShares Major Metro Housing Down (DMM) will attempt deliver three times the inverse cumulative percentage change in the index.
This particular Case Shiller Index is a value-weighted index of 10 major U.S. metropolitan areas, representing approximately 30% of the U.S. total housing market, with weights derived from U.S. Census data on housing counts and average home prices. While not the case recently, housing returns have historically shown low or negative correlations when compared to other asset classes. By providing exposure to housing, these ETFs will allow investors to more purely access the real estate market (outside of actually buying a house) – something they currently cannot do. The $20 trillion U.S. housing market has never been securitized in this fashion, thus these ETFs will open-up a whole new realm to investors.
Similar to other MacroShares products, these ETFs are uniquely structured in that they are only offered in pairs, with an equal number of UMM and DMM shares created (with the combined price of the shares not exceeding $50). Both ETFs have separate trusts fully collateralized by short-term U.S. Treasuries with an underlying settlement agreement between the trusts that pledge assets to each other based on the movement of the underlying Case Shiller Index. For example, if UMM and DMM both start with a value of $25 per share and the underlying index moves up 4%, $3 is “shifted” from the DMM trust to the UMM trust ($25 x 4% = $1, $1 x 3 leverage = $3), thus the price of UMM goes to $28 and DMM to $22 (though note that the assets won’t actually move between the trusts until the final settlement date as described below).
In addition to the gain or loss on the movement of the shares, there is the potential for additional income if the interest on the Treasuries held in the trusts exceed the trusts’ expenses. Also, because of the unique structure and leverage of these ETFs, there are some other nuances to be aware of. If one of the funds goes up or down significantly, there is the potential that they effectively drain the assets of the other fund (in our example if the index moves up or down by more than 33.3%). In this case, the funds would simply be liquidated and investors paid at the net asset value. Regardless of performance, the funds have a final scheduled termination date of November 25th, 2014, whereby they will be liquidated and the net asset value paid out.
There are several ways in which investors may be able to take advantage of these products: 1) If they have a strong conviction regarding the future direction of the housing market and want to attempt to capitalize on that conviction; 2) a homeowner could theoretically use DMM as a hedge on their own house (i.e. if the value of housing is decreasing, DMM would be increasing; 3) a future homeowner might be able to protect their ability to afford a house in an increasing market five years from now by purchasing UMM today; or 4) an investor may simply want some exposure to an uncorrelated asset as part of their overall portfolio. Note that the expense ratio on UMM and DMM is 1.25%.
