A week after folding the second incarnation of its unique up/down crude oil funds due to the failure to attract sufficient investments, MacroShares burst back on to the scene with the launch of two new exchange-traded products (they’re not technically ETFs). The MacroShares Major Metro Housing Up (UMM) and Major Metro Housing Down (DMM) began trading on Tuesday. While these funds are attracting significant attention because of their unique strategies and exposure, they are also being greeted with a fair amount skepticism.
According to their fact sheets, DMM and UMM will track three times the cumulative percentage change in U.S. single-family home prices, as measured by the S&P/Case-Shiller Composite-10 Home Price Index. This benchmark is a frequently-monitored indicator of single-family home prices in ten major markets (New York, San Diego, San Francisco, Washington, D.C., Boston, Chicago, Denver, Las Vegas, Los Angeles, and Miami). After relatively steady appreciation since the early 1990s, this index has plunged over the last two years amidst spikes in foreclosures and freezing credit markets.
While these ETPs are the first of their kind to offer exposure to this index (let alone leveraged exposure), that’s hardly the only unique attribute of the funds. The two trusts underlying the securities are bound by an agreement to pledge assets to each other over time, based on movements in the Case-Shiller Index. So in essence, they are aggregate zero-sum investment securities.
Also unlike traditional ETFs, DMM and UMM have a predetermined maturity date: November 25, 2014. Whereas most ETFs are intended to continue indefinitely, the MacroShares funds will transfer assets based on the ending value of the Case-Shiller Index on their maturity date. Although the payout upon maturity will be based on the value of the index at that time, UMM and DMM will not necessarily track this benchmark in the interim.
Since prices for the funds are market driven, they will be based upon investor expectations of the benchmark’s level at the time of expiration, meaning they will not necessarily reflect current movements in home prices.
In theory, if the Case-Shiller Index were to fall, but investors simultaneously became more optimistic of the long-term prospects of the housing market, UMM’s price could rise. This isn’t necessarily a drawback of the funds (it should actually help to smooth out some short term volatility), but something that investors should understand before jumping in.
There is also concern regarding the sustainability of the housing up/down funds. As I mentioned, MacroShares recently announced the shuttering of two similar funds that tracked NYMEX light sweet crude oil futures contracts, in accordance with a provision that allowed the issuer to do so if assets in the funds did not reach a certain level. Similar to its Oil Up (UOY) and Oil Down (DOY) funds, the new MacroShares products feature several provisions that would allow the issuer to terminate the funds prior to maturity. In addition, some investors have balked at the fund’s expense ratio, a relatively hefty 1.25%.
Although MacroShares is truly unique in its ability to offer diversified exposure to residential real estate prices in the country’s largest markets, investors looking to gain either long or short exposure to the housing markets do have a few other options (beyond, of course, the deed to their own residence):
- iShares Dow Jones U.S. Home Construction Index Fund (ITB): This ETF tracks the performance of the home construction sector of the U.S. Constituent companies include residential homebuilders and manufacturers of mobile homes. Since new home construction is linked to the number of and demand for houses on the market, there is likely to be a strong correlation between ITB and national home prices.
- iShares FTSE NAREIT Residential Plus Capped ETF (REZ): REZ measures the performance of the residential real estate, healthcare, and self-storage sectors of the U.S. equity market. REZ is likely to have a weaker correlation with home prices since (1) it contains a significant amount of healthcare and (2) its residential real estate is primarily comprised of apartment buildings.
Disclosure: No positions at time of writing.