Today is the last day of trading for the two exchange-traded products from MacroShares, following an announcement from the company that the MacroShares Major Metro Housing Up Trust (UMM) and MacroShares Major Metro Housing Down Trust (DMM) had reached an early termination trigger by failing to accumulate at least $50 million in assets. The registration statements for the products provide for a maturity date of November 25 2014, but allow early termination when “the amount of cash and treasuries on deposit in the Up Trust and/or Down Trust is less than fifty (50) million dollars per trust on any business day and we elect, in our discretion, to terminate the paired trusts.” Recently, UMM and DMM had aggregate assets of about $20 million.
On January 6, a final distribution payment will be made to UMM and DMM shareholders of record as of December 31 based on the underlying values of the respective trusts. The underlying value of the trusts will be determined based on the November 24, 2009 release of the Reference Value of the S&P/Case-Shiller Composite-10 Home Price Index.
The shuttering of UMM and DMM marks the third time that paired exchange-traded products from MacroShares failed well before their intended maturity date. The first products, MacroShares Oil Up and MacroShares Oil Down, were terminated in June 2008 when a spike in oil prices essentially bankrupt the down fund. MacroShares launched a new pair of oil funds a month after shuttering the first set, but these were ultimately shut down due to failure to reach a certain asset threshold as well.
In our look ahead to the future of the ETF industry (see Ten ETF Trends For The Next Ten Years), we anticipated great things from the MacroShares line of products. The “paired ETF” concept has several potential advantages over a futures-based investment strategy as a means of achieving commodity exposure, and the structure could provide investors exposure to a number of closely-watched indicators, ranging from inflation to unemployment rates. The MacroShares products actually did a very good job of accomplishing their stated objective — providing investors exposure to residential real estate prices — so it’s a shame that they met an early demise.
But it seems that there are a number of kinks to be worked out in the “paired ETF” model, and it is becoming less and less likely that investors will be willing to give MacroShares another shot in the future. UMM and DMM are being shuttered less than six months after their launch, a very short period of time in the ETF industry (particularly for new product launches). Efforts to promote the new fund were minimal, and now MacroShares is sticking investors with the tab for winding down the failed funds. MacroShares estimates that the early termination expenses will range from $0.85 to $0.90 per share, or about 4% of the share price.
If MacroShares tries again, expect a classic example of the “network TV phenomenon” — investors burned by early terminations before will be hesitant to jump in for another round, worried that the new funds will be destined for a premature end as well (which of course will lead to another termination).
It’s clear that there are still a number of kinks to be worked out of the paired ETF concept, and its now clear that MacroShares won’t be the one to take this type of product mainstream. But the basic premise behind the MacroShares products has tremendous potential, and we wouldn’t be the least bit surprised if another issuer steps in
Disclosure: No positions at time of writing.