“With the market treading water for the past week or two, and some negative economic news being released many are wondering if this is a start of at least a short term market downturn. The following 5 ETFs should help insulate Read more…
Today marks the first time investors will be able to purchase exchange traded products linked to U.S. Housing. MacroMarkets says it is planning for shares of the MacroShares Major Metro Up (UMM) and the MacroShares Major Metro Down (DMM) to start trading today on the New York Stock Exchange. Read more…
MacroShares’ planned initial public offering for its Major Metro Housing exchange-traded products has failed, due to an imbalance in orders between investors wanting to buy upside exposure to U.S. residential home prices and those wanting to invest on the downside. The company says it will now launch the products using a traditional, market-maker-driven process; the new launch is scheduled for sometime in the next few days.
“We set a $125 million minimum for the initial public offering and we had IPO interest that was a multiple of that,” said MacroShares Chief Executive Sam Masucci. ”Ultimately, however, we could not get $125 million to cross at appropriate prices.”
The Major Metro Housing Up (NYSE Arca: UMM) and Major Metro Housing Down (DMM) are designed to deliver 300% and -300% of the return of the S&P/Case-Shiller Home Price 10 Index over the next five years. They will achieve that return not by buying actual houses, but by following MacroShares’ patented “teeter-totter” product structure.
Under that structure, the Up and Down Macros hold Treasury securities as their sole asset. As the benchmark index moves up or down, those Treasuries are transferred back and forth between the Macros. The structure allows MacroShares to launch products tied to any reference price, including previously uninvestable benchmarks like national home prices.
To function, however, there must be an equal number of Up and Down shares, and the price of those paired shares must sum to a predefined number; in the case of the housing Macros, $50 (i.e., if UMM is worth $30, DMM must be worth $20). And that’s where the IPO had problems, according to MacroShares.
The firm tried to raise assets for the products through a Dutch-auction IPO, wherein investors “bid” for IPO shares at prices of their choosing. At the end of the IPO, software was supposed to match up orders to ensure the largest possible IPO at the best possible price.
“The ability to short is essential to an efficient market, otherwise there’s nothing to stop zealots from pricing things abnormally high.”
One version of the ETF (UMM) allows investors to buy the index.
“It’s like buying a house, except you don’t have to go through the real estate agent, take possession of a property, maintain it, rent it out,” Shiller says.
The other offering (DMM) provides an opportunity to short the index.
“Markets like this will also create an infrastructure for products,” Shiller says. “For example, insurers could issue home-equity insurance and then hedge themselves by taking a position in this market.”
The biggest news in ETF-land over the next month could be the launch of the MacroShares home price ETFs. Or, maybe we shouldn’t say ETFs.
MacroShares is going to great lengths to remind people that these are not technically ETFs; they’re exchange-traded products, or ETPs. Understanding that difference is the key to understanding how these products will work—and where they should be priced.
I suspect that a lot of ink will be spilt over the coming months trying to do just that. Because they are different from traditional ETFs, and because the initial pair of MacroShares was poorly handled, MacroShares are widely misunderstood. The prospectus for these things reads like Finnegan’s Wake, and the structure is unique, adding to the confusion.
But that confusion is not needed. When you get right down to it, these products are pretty simple and will work well if people understand what they are designed to do. Here’s a primer.
Home Price ETFs
The new MacroShares Major Metro Housing Up (ticker: UMM) and Major Metro Housing Down (ticker: DMM) ETPs are designed to deliver 300% and -300% of the return of the leading national home price index, the S&P/Case-Shiller 10-City Composite Home Price Index, over a specific period of time.
The last part of that sentence is critical.
Most ETFs are designed to track the performance of an index on a daily basis. The S&P 500 SPDR (NYSEArca: SPY), for instance, is designed to track the S&P 500′s return today, tomorrow and forever. The fund does that by holding all of the securities in the index. Arbitrage mechanisms exist to ensure that SPY stays close in value to the S&P 500 on a minute-by-minute basis.
UMM and DMM are different. For one, they don’t hold “housing.” All they hold is Treasuries. They deliver the return of the Case-Shiller index because they are contractually obligated to shift those Treasuries back and forth between the two funds based on the direction of the index: If the index goes up, Treasuries go from DMM to UMM; if it goes down, the opposite happens.
This unique structure—often called a “teeter-totter”—is what lets MacroShares track nontypical financial metrics like “house prices.” Theoretically, they could be tied to anything.