Housing has played a key role in the economy and stock market this decade, both on the way up and the way down. As a result, the Case-Shiller Home Price Index is being followed widely.
MacroShares is selling an exchange-traded product, or ETP, that tracks the S&P Case-Shiller Composite 10 Home Price Index, with 10 signifying the largest U.S. cities. (An ETP resembles an exchange-traded fund, or ETF.) The two funds are Major Metro Housing Down and Major Metro Housing Up .
The MacroShares ETP concept is odd. Each fund will own short-term Treasuries. As the underlying value of the index changes from month to month, assets will move back and forth between the two, so the underlying value of both funds equals $50. Each may start at $25, and if the Case Shiller index rises 5 per cent the following month, we might expect the underlying values to be $26.25 for the Up shares and $23.75 for the Down shares.
But the funds will deliver three times the move in the index, so a 5 per cent rise or fall in the index will result in a 15 per cent change in the underlying values of the funds.
Much has been made about inverse and levered ETFs from ProShares, Rydex and Direxion because of their daily reset. (Many of those funds have produced losses.) With the MacroShares, money will switch from one fund to the other upon release of the monthly report from Case-Shiller. Daily resets aren't an issue.
"Underlying value" is synonymous with "net asset value." The underlying value is based on the index, which, as I said earlier, changes monthly. But between reports, the market price of the funds will trade based on future expectations.
Whereas ETFs typically don't stray from their net asset values, MacroShares says each fund will "reflect investor expectations beyond the near term." In other words, the funds' market price will wander from the underlying value.
That means investors must be correct about the direction of the index and investor sentiment. It would be possible for the underlying value (the index) to rise but for the Up shares to fall if the market didn't think a rising trend was sustainable.
The debut of the funds has been pushed back because the plan to hold an auction failed due to an imbalance in demand between the Up and Down shares, favoring the Up shares. MacroShares has decided to forgo the auction in favor of providing seed money and relying on market-makers to commence trading.
Nevertheless, the funds probably will be popular for speculators. As someone who manages longer-term portfolios, I have little interest in MacroShares for my clients.
The Major Metro Housing products have been in the pipeline for a long time. Robert Shiller, who developed the home-price index with Karl Case, has said people can hedge their homes or the intention to buy a home. But reliable hedging using the funds seems nearly impossible.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of "Random Roger's Big Picture Blog."
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