MacroShares Up/Down, Round Two: Long-term Futures on Oil

Includes: DOY, UOY, USO
by: IndexUniverse

By Heather Bell

The MacroShares Oil Up and Oil Down funds have been resurrected ... sort of.

Yesterday, MacroMarkets LLC launched the MacroShares $100 Oil Up (UOY) and the MacroShares $100 Oil Down (DOY) funds on the American Stock Exchange. Like the recently closed MacroShares, these new ones also track the price of oil, but with one major difference.

To understand why, you have to understand how the MacroShares work, which is basically like a teeter-totter. The funds are always issued in pairs, with an Up fund and a Down fund. They don't actually hold the underlying assets—oil, in this case—but rather Treasuries. The money invested in the two funds flows between them according to how the underlying benchmark is doing. When the underlying benchmark goes up, the teeter-totter tilts toward the "up" fund and a proportionate amount of assets flows into the up fund. When the benchmark goes down, the opposite happens.

For the last pair of MacroShares, which also tracked the price of oil, the "fulcrum" for the teeter-totter was set at $60/barrel for oil. (As unbelievable as it sounds, it wasn't that long ago that oil was at $60/barrel—the good old days, as it were.) When the price of oil breached $120, though, the first MacroShares Oil Down fund found itself without any assets, far sooner than anyone expected. In fact, the funds had a built-in "shut-down" trigger at a price of $111/barrel, after which it was determined that the funds would be liquidated. That happened in June.

Fund Closure Trigger

The fulcrum for the new shares, as their name implies, is set at $100/barrel. So, basically, oil would have to hit $200/barrel for the "down" fund to find itself without any assets (which is entirely possible if you listen to Goldman Sachs). However, that's not what will trigger a fund closure: If the price of light sweet crude remains above $185 for three consecutive business days, the funds will terminate.

"As the price and volatility levels of crude oil reach historic heights, institutions and consumers stand to benefit from new, effective means of managing energy market exposure beyond the near term. As exchange-traded securities that trade like stocks, MacroShares $100 Oil can help people to more easily manage mounting risks and investment opportunities related to this fundamentally important commodity," said economist and MacroMarkets co-founder Robert Shiller.

UOY and DOY both charge expense ratios of 0.95%, down from the 1.6% expense ratio of the initial funds. You can read the prospectus here.

The MacroShares are benchmarked against front-month crude oil contracts. However, history suggests that the funds will actually trade as long-term futures on oil, reflecting the expected price of oil at some undetermined point in the future. If you need a more exact measure, you can also gain exposure to oil using a variety of traditional ETFs, such as the popular U.S. Oil Fund (NYSEARCA:USO). That fund simply holds the next-month futures contract.

The real beauty of the MacroShares concept is that it can be applied to pretty much anything—MacroMarkets already has filings with the SEC for pairs of funds tied to home prices and medical cost inflation. The only limitation seems to be that the products are rather range-bound by the 100% limits, with potentially limited lifespans, which implies that they might work best with benchmarks that typically display reversion-to-the-mean movements.