They are legalized gambling.
"Investors" can now bet for or against a recovery in the residential real estate market. The two ETFs are designed to mimic the movement of U.S. home prices. The two ETFs are called MacroShares Major Metro Housing Up (UMM) and MacroShares Major Metro Housing Down (DMM).
Incredibly, Robert Shiller, the Arthur M. Okun Professor of Economics at Yale University, and best-selling author of Irrational Exuberance, is involved. In fact, he is MacroShares' co-founder and chief economist. Both ETFs are benchmarked to the well-known S&P/Case-Shiller Composite-10 Home Price Index of home prices in the country's 10 largest cities.
How do they work? The securities are "paired" and feature a 300% leverage factor. "Up" is designed to rise when U.S. housing prices climb. Its counterpart, "Down," goes in the inverse direction, rising when real estate values fall. Unlike most ETFs, Up and Down do not invest directly in a relevant underlying asset such as stocks, bonds, or houses. Instead, they 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, according to a predetermined formula that is driven by changes in the housing index, based on the movement of housing prices. This transfer of value back and forth 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. Because of the pairing requirement, an equal number of shares for each fund will be created. Because of the leverage factor, the Up and Down ETFs will experience changes of 3x the changes in the S&P/Case-Shiller Composite-10 Home Price Index.
This has to be the low point in what has been a distinguished career. Shiller said, "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. Our current financial crisis is largely due to a failure to manage housing risk. At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets." A couple of months earlier, as part of a failed attempt to auction basically these same vehicles, Shiller said, "Our current financial crisis is due to a failure to manage housing risk. MacroShares Housing products will begin to fill this massive void. MacroShares Major Metro Housing Up and Down are market-based solutions to this unprecedented financial crisis."
In what way these ETFs provide a "liquid, transparent market" for homes or provide a way to reverse the "failure to manage housing risk" is unclear. Unlike REITs, they don't buy any real estate. They won't own any homes. They just swap money back and forth between the ETFs, that is between those who place their bets one way or the other on the direction of home prices.
What's next, ETFs based on Manny Ramirez's batting average? The roll of dice? The turn of a card? We already have casinos for that. These bets would be better placed in a sports book in Las Vegas than touted as an "investment" that "provides liquid, transparent markets" on home prices or promises to help begin to solve the "unprecedented financial crisis" created by the housing bubble.
Oh, I forgot to mention a couple of things.
- For one, MacroMarkets warns that the prices of the funds may diverge from underlying value. "For example, the market price of Down will reflect supply, demand, and investor expectations regarding the future path of home prices over the remaining term of the security." So unlike Las Vegas, bettors are also risking that the house (pun intended) won't actually pay off the bets correctly.
- Two, the funds will make quarterly distributions of net income, if any, on the Treasury securities.
- And third, they have an expense ratio of 1.25%. That amounts to the house's "rake" on the pot. Which is all you need to know to understand why these have been introduced.
Technically, these are not exchange-traded "funds," because they own no underlying relevant assets--no houses. They are exchange-traded "products."
So there you have it: A perfect "product" for post-industrial USA. It creates no value, produces nothing tangible, and offers great risk. The only guaranteed payoff is to the offeror. Since the ETFs do not own any relevant assets, one cannot even make a case for efficient price discovery in residential real estate to justify them. They are the antithesis of "investing." They are vehicles for naked gambling. Just bet up or down (black or red). You have a 50% chance of winning.
