Tuesday, May 19, 2009

New Housing Price Trusts

The new MacroShares Major Metro Housing Trusts will start trading soon, and I'm interested to see how they do. The trusts were created by Yale economist Robert Shiller's company, MarcoMarkets LLC. Two trusts will be issued—the Major Metro Housing Up Trust (fact sheet here) and the Major Metro Housing Down Trust (fact sheet here). The trusts are designed to deliver 3 times the percentage change in the S&P/Case-Shiller Composite-10 Home Price Index over a specific period of time—in this case, over the period ending on November 25, 2014. The trusts are designed to measure the market's expectation of where housing prices will be five years from now. The trusts are not ETFs, and they're not designed to track their NAVs on a day-to-day basis. Instead, the trusts should trade based on where investors think the Case-Shiller Composite-10 index will be on November 25, 2014. This article from IndexUniverse offers the clearest explanation of how the trusts will work that I've seen:

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. [EC: Technically this isn't true: no assets are shifted between the trusts until maturity. The trusts enter into repo agreements that allow their underlying values to track the monthly changes in the index, and quarterly distributions are based on each trust's "underlying value."] 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. The Importance Of The Time Horizon The key thing to understand about UMM and DMM is that they are designed to "expire" on Nov. 25, 2014. At that point, investors will receive a payment based on 300% of the change in the S&P Case-Shiller index over the intervening time period. To be more specific, both UMM and DMM start with a net asset value of $25/share. That NAV is linked to the level of the Case-Shiller index as of Dec. 31, 2008. On Nov. 25, 2014, investors will be paid based on 300% of the change in the index from Dec. 31, 2008 through Aug. 31, 2014. (The end payout will be based on the August 2014 reading because the index is published with a two-month lag.) Where should UMM and DMM trade between now and November 2014? Simple: They should trade based on where investors expect the index to be on Aug. 31, 2014. It's really that simple. It's like a futures contract: Everything that happens between now and expiration is mostly irrelevant.
The prospectuses are available here. The WSJ also ran a nice piece on the trusts a couple weeks ago. Ultimately, I'm not sure the Major Metro Housing Trusts will be successful—they seem like too much of a niche bet to draw enough interest. But it's certainly an interesting idea.

5 comments:

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