The MacroShares Anomaly

The main difference between ETFs/ETNs and other investment vehicles, particularly closed-end funds, is the ability to keep market price and Net Asset Value (NAV) closely aligned. The process is actually quite simple: ETFs have “authorized participants” with the ability to exchange shares of the underlying asset for shares of the ETF (when the ETF is trading at a premium) and vice-versa. This arbitrage mechanism is key to keeping the market price and the NAV closely aligned.

Funds from MacroShares, however, are not trading at NAV. MacroShares $100 Oil Down Shares (DOY) is trading at a -12% discount to NAV and MacroShares $100 Oil Up Shares (UOY) is trading at a +33% premium to NAV. This is characteristic behavior of closed-end funds, not ETFs.

So why are MacroShares trading at such large discounts/premiums to NAV? For starters, it’s because they told us this would happen. The UOY fact sheet states:

“For all MacroShares products, premium and discounted market prices (relative to underlying value) are normal. These market prices reflect supply and demand, as well as factors that the prices of other exchange-traded products may not be affected by, including investor expectations for Reference Index performance over the remaining term of the security.”

MacroShares, sometimes referred to as the teeter-totter trade, always come in pairs. For every “up” share there is a corresponding “down” share. The quantity of “up” shares is equal to the quantity of “down” shares; both have 1.7 million shares outstanding. While they do utilize authorized participants, there is no independent creation and redemption of shares. As the prospectus says, “The Down MacroShares may be redeemed on any business day only together with Up MacroShares (as defined in this prospectus) in MacroShares Units and only by holders who are authorized participants.”

MacroShares has another document titled Exchange-Traded Crude Oil: Alternative Vehicles that puts MacroShares in a category of their own - not ETFs, not ETNs, not futures, but MacroShares. Whatever they really are, MacroShares are usually categorized as ETFs. That is how Morningstar, IndexUniverse, Ned Davis Research, and a host of other sources have classified them also.

MacroShares have other problems too. A quick check of my quote screen shows UOY with a bid of $3.26 and ask of $3.39 (a 4% spread) and DOY has a bid of $8.25 and ask of $8.40. That’s correct - there is no volume and there is no liquidity, not withstanding their feeble attempt to increase volume with a share-split recently.

Therefore, to answer the question - No, MacroShares are not ETFs. However, I’m not sure they should be classified as closed-end funds either, although they certainly act more like closed-end funds than ETFs.

Disclosure: no positions

Comments

[tuj:]

Its a good idea in theory because it avoids the issues USO is having trying to roll its position every month, which distorts the WTI/Brent spread. But it seems like the index should track better; that someone should be able to create a good oil index without taking a position in the underlying forwards and incurring the roll cost every month.

Feb 27 04:17 PM

[Paul Franc:]

Ron,

Nice post, I have some additional thoughts after recently dumping their crappy UOY stock (or whatever it is):

I have the unfortunate experience of buying UOY right after their previous ones terminated, and ever since day one their fund is bleeding out of money. How is this happening? Check this out:

Their fund charges 0.95% annually PLUS (big PLUS) a $600k hidden "fixed annual fee". Since their funds hold treasury which is yielding only 0.1%, their fund combined is bleeding out 0.85% annually. AND let's add in the $600k (PER FUND if I forgot to mention), since their funds are not doing **** they have only $20m sitting in the up and down funds combined, the $1.2m annually adds up to an additional 5% in fees!

Now there you have it, you add up the NAV for both UOY and their down fund which in theory should always equal to $50 (teeter-totter), but in reality it's been slowly declining since day 1. Now they only add up to $47.96 (pre-split level). These scammers are secretly taking money out of the fund every day and now 8 months since they started thing scam the funds have lost 10% of their value simply due to fees!! No hidden counterparty risk? LMAO.

So I suspect the real reason why they split those shares is to hide the effect of the ridiculous fee on their NAV (after split the dollar fee number per share is 1/4 of the original). Maybe it's getting noticed. In any case these two funds deserve a top spot on your ETF deathwatch and macro market or whatever the company's name is need to be prosecuted for fraud.

Feb 27 04:31 PM

[Ron Rowland:]

MacroShares have also filed for Medical Inflation Up/Down and Major Metro Housing Up/Down. They have been getting a large amount of favorable pre-coverage on these potential offerings. But, guess what? They won't track their underlying indexes either.

Without the ability to force (arb) the price to track the NAV, they are lacking the "essence" of what makes an ETF and ETF.

Feb 28 09:47 AM

[Zapf:]

I hate this ETF-it tracks oil prices down but doesn't track it up at all. I suspect it's a huge scam and waste of time-as are most ETFs.

Mar 17 06:08 PM