MacroShares to Launch Levered Up, Down Housing Price ETFs

By Matthew Hougan

MacroMarkets is finally taking steps to launch the product we've all been waiting for ... a house price ETF.

MacroMarkets has filed papers with the Securities and Exchange Commission for the right to launch Up and Down Macros tied to the S&P/Case-Shiller Composite 10 Home Price Index. The Case-Shiller is the leading index of home prices across the nation. Its value, reported monthly, is tied to the average price of a home in 10 major metropolitan markets, including New York, Boston, San Francisco and Los Angeles.

The new Macros will allow investors to bet on the direction of the home price index, giving them the first chance ever to trade or hedge home prices from the comfort of a traditional brokerage account.

Interestingly, the funds will be levered by a factor of two:

• The MacroShares Major Metro Housing Up (NYSE: UMM) ETF will deliver two-times the return of the benchmark index
• The MacroShares Major Metro Housing Down (NYSE: DMM) will deliver two-times the inverse return of the index.

Like all of the MacroShares, these products work like a teeter-totter. The funds can only be offered in pairs, with equal number of Up and Down shares. If home prices go up, assets are shifted from the Down Macro to the Up Macro, and vice-versa.  This paired structure is what allows the MacroShares to be tied to illiquid markets like housing—the only asset they hold is Treasuries, and those Treasuries are simply shifted from one fund to another depending on the price point of the index.

Because they hold Treasuries, the new funds also provide income: both the Up and Down Macros earn interest income, which should add about 4% to annual returns at current interest rates.

There are a few quirks. Like all Macros, the funds are limited in how far they can move. Because they work like a teeter-totter, the down fund can only fall 100% (reflecting a 50% drop in house prices) while the up fund can only rise 100% (reflecting a 50% rise in home prices). After that, the funds will be liquidated and investors will be paid based on the net asset value.

The funds also have a 10-year term: after 10 years, the funds will be liquidated.

It's also important to understand where the funds will trade vis-à-vis the index. The S&P Case-Shiller indexes are reported monthly with a two-month lag; that is, the June index price reflects home prices for the three months ending in April. The funds' net asset values will be based on this lagging index price.

Investors, however, will likely look forward when establishing the market price for the funds, using not just the index value but also expectations for where that value is heading. The funds will likely trade somewhat like a long-term future on housing prices, reflecting a bet on medium-to-long-term trends in home price movements.

It's great to see MacroShares finally making good on its promise to open up new, important and illiquid sections of the marketplace. A lot of investors were disappointed that the first MacroShares were tied to the price of oil, which can be accessed through a variety of means. These new MacroShares, in contrast, open up a major new market for the first time.

•   The prospectus for the housing trust is available here.
• More on choosing the right ETF  

 

Comments

[Randy_H]

Once there is enough liquidity it should be very possible to build effective hedge positions against one's personal housing position. That is, buying in a down market can be hedged with DMM; sitting out the market can be hedged with UMM.

Hopefully there will be options on these ETFs before too long also. Then quite a few things become possible.

2008 Jun 16 02:50 AM

[Cool Hand]

Are the Macroshares Housing ETFS (DMM and UMM) ever going to get launched? If so, when?
It has been more than 9 months since the announcement was made.
I think there is a lot of pent up demand for such products.

2009 Mar 30 10:41 AM