Is There a Bad Bet with the MacroShares Housing Funds?

The MacroShares Major Metro Housing exchange-traded products which were launched in June of 2009, let you bet 3X (UMM) the movement of the Case-Shiller index of home prices in ten major U.S. cities or 3X (DMM) the inverse of the index’s movement. The major metropolitan cities throughout the country include Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington, D.C.

These ETPs are a great way to play the real estate market without the closing costs on purchasing a home or the hassle of managing the day to day operation of a home. With real estate prices stabilizing and at recession lows how could an investor go wrong betting on the real estate market? The movement in real estate prices is certainly not like the movement in stock prices. The MacroShares Major Metro Housing Down (DMM) ETP would just seem like a bad bet considering the ETP is not set to mature until November of 2014, but then again anything can happen.

MacroMarkets Chief Economist and co-founder, Robert Shiller was quoted saying “My guess would be that home prices are going to level off — they’re not going to keep falling,” Still, it’s “hard to predict” a speculative market, and “I am not optimistic that we’re going to see any sharp rebound.”

There is also some concern with the product functionality because of the 3X leverage. ”Because of technical quirks, the securities are unlikely to track the indexes properly. Instead, investor expectations for housing values will likely determine how the securities trade. But the timing of the products’ launch — just as the end of the long slide in housing prices is finally coming into view-and their 1.25% expense ratios are the biggest strikes against this dumb idea,” Elizabeth Ody Reports From Kiplinger.

Here is a look at some of the details on the two ETPs from MacroShares below:

MacroShares Major Metro Housing Up (UMM) allow investors to express a bullish view on the movement of the S&P/Case-Shiller Composite-10 Home Price Index. The underlying value (UV) of UMM tracks the percentage change of the index with three times leverage. The market price of UMM reflects other factors, including consensus expectations of the cumulative return of S&P/Case-Shiller Composite-10 Home Price Index, plus potential quarterly net income distributions, over the remaining term of the security.

MacroShares Major Metro Housing Up funds are collateralized via a trust secured by investments in short-term U.S. Government obligations, overnight repurchase agreements secured by Treasuries and cash. This trust collateral generates automatic income distributions for MacroShares investors to the extent that trust income exceeds trust expenses within a quarterly period.

MacroShares Major Metro Housing Down (DMM) allow investors to express a bearish view on the movement of the S&P/Case-Shiller Composite-10 Home Price Index. The underlying value (UV) of DMM tracks the percentage change of the index in an inverse manner with three times leverage. The market price of DMM reflects other factors, including consensus expectations of the cumulative return of S&P/Case-Shiller Composite-10 Home Price Index, plus potential quarterly net income distributions, over the remaining term of the security.

MacroShares Major Metro Housing Down funds are collateralized via a trust secured by investments in short-term U.S. Government obligations, overnight repurchase agreements secured by Treasuries and cash. This trust collateral generates automatic income distributions for MacroShares investors to the extent that trust income exceeds trust expenses within a quarterly period.

Take a look on how they have performed since inception below:

Disclosure: No positions

Comments

[Gary Lucido:]

There are actually several subtleties with these instruments. For one, the expenses are likely to be higher than 1.25%. I cover the issues here: blog.lucidrealty.com/2.../

Aug 31 05:57 AM

[RobertB:]

Let's see.... the housing market is significantly larger than the stock market, home equity (not too long ago, anyway!) was something like 2/3rds a typical consumer's balance sheet, and the lack of efficiency and price discovery in housing was arguably the single-largest contributor to historic seizures in global financial markets and ensuing wealth destruction. And then there's shiller, a guy that has spent decades and likely invested a ton of$ attempting to spark innovation that might help address this problem.

no doubt macroshares are more expensive (and very different) compared to ETFs - and they're no panacea to the housing market mess - but labelling these things a "dumb idea" in the absence of alternative, more efficient means to get (or hedge) exposure to future home prices is puzzling.

Aug 31 10:38 AM

[Ron Rowland:]

If the typical homeowner buys a house with 10x to 20x leverage (10% to 5%) down because he cannot afford to put any more down, then where is he going to get 3x to 7x his down payment in order to hedge his investment with a 3x product that probably does not represent the city or neighborhood where his house sits?

Aug 31 04:46 PM

[kennyg:]

I live in a northern suburb of Atlanta. How do I hedge the value of my house? It would be great to have an opportunity to do so, but not with the ten cities in your sample. Las Vegas is down almost 50% and Cumming, Georgia is down 11%. It just won't work. It is a gret idea and the true purpose behind hedging, but you have to do it by region.

Aug 31 06:12 PM

[LKofEnglish:]

"hey buddy have you heard the news you know that annie's back in town. it won't take long just watch and see how the fellas lay their money down. her style is new but the face is the same as it was so long ago. but from her eyes a different smile like that of one who knows.

Aug 31 11:32 PM