AssetPreserver News

Tired of housing prices going down? Happy when they go up? Investors can now bet for or against a recovery in the residential real estate market with new exchange-listed securities designed to mimic the movement of U.S. home prices.

Investment manager MacroMarkets on Tuesday launched exchange-traded products on the NYSE Arca (Archipelago Securities Exchange) designed to track housing values.

MacroShares Major Metro Housing Up and MacroShares Major Metro Housing Down are benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index. The paired securities will feature a 300% leverage factor.

“For the first time, the market will have available exchange-traded benchmarks as an indication of where investors believe U.S home prices are headed,” said Robert Shiller, MacroShares chief economist.

“Our current financial crisis is largely due to a failure to manage housing risk,” Shiller added. “At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets.”

The MacroShares Major Metro Housing Up is designed to rise when U.S. housing prices climb. Its counterpart, MacroShares Major Metro Housing Down, profits when real estate values fall.

MacroShares exchange-traded products (ETP) don’t invest directly in an underlying asset such as stocks, bonds or commodities futures. Instead, MacroShares are issued in pairs, and an equal number of shares for each fund are created. The funds invest in short-term Treasury securities and overnight repurchase agreements.

The paired trusts have a binding agreement to pledge assets to one another over time, based on the movement of housing prices. This transfer of Treasury securities back and forth between the funds changes their values and gives investors exposure to the direction of U.S. home prices. The structure resembles a see-saw as the assets are shuffled between the paired trusts. The arrangement has also been compared to total-return swaps.

Because of the leverage factor, the MacroShares will experience changes of three times, or 300%, of the S&P/Case-Shiller Composite-10 Home Price Index.

The MacroShares, which can be traded intraday, have key differences from traditional ETFs. MacroMarkets warns that the prices of the funds may diverge from underlying value.

“Premium or discounted prices for these securities reflect a variety of market factors and expectations,” the firm says. “For example, the market price of MacroShares Major Metro Housing Down will reflect supply, demand, and investor expectations regarding the future path of home prices over the remaining term of the security.”

The funds will make quarterly distributions of net income, if any, on the Treasury securities.

MacroMarkets had tried to launch the home-price products through a public auction, but no bids were accepted because there was insufficient demand for an equal number of Down and Up MacroShares at the prices at which such shares were offered in the auction.

Last year, MacroMarkets liquidated a pair of funds linked to crude oil prices when the “down” version ran out of assets when prices spiked. The oil funds saw premiums and discounts to net asset value. The company followed up with MacroShares $100 Oil Up Trust and MacroShares $100 Oil Down Trust, but the funds were recently shut down due to lack of assets.

The new MacroShares tied to home prices will be followed closely by ETF observers. The products’ backers say the structure can give investors exposure to inaccessible asset classes or economic indicators.

Note the shares are a in a trust and mature in November, 2014.

Summary

UMM – MacroShares Metro Housing up. 300% leverage. 1.25% expense ratio (expensive).

DMM – MacroShares Metro Housing down. 300% leverage. 1.25% expense ratio (expensive).

According to MacroShares website, they are a publicly-traded partnership which means all income will be reported on a K-1 form (rather than a 1099 form).