When MacroShares launched its most recent paired fund offerings earlier this year, it did so in a very interesting housing environment. Home prices in many of the country’s largest markets, including Florida, California, and Arizona, had seen sharp declines over the last year, and it seemed that there was no end in sight. In the weeks following the launch of the MacroShares Major Metro Housing Up (UMM) and Down (DMM), investor sentiment plummeted, which sent DMM skyward and UMM dropping like a stone. But we’ve seen a sharp reversal in recent weeks, and in yet another sign that the worst is behind us, these funds appear to be showing that the housing market is expected to make a modest recovery in coming years.
A New Take On ETFs
MacroShares are similar to traditional exchange-traded products in many ways, but feature a few nuances that separates them as well. UMM and DMM are linked securities, bound to transfer assets back and forth based on the value of an underlying index (in this case the Case-Shiller Composite 10 Home Price Index). But MacroShares also reflect consensus expectations for the returns on the underlying index over the life of the securities, meaning that they can and do deviate (sometimes significantly) from their underlying value. Recently, DMM was trading at a discount of about 20% from its underlying value, while UMM was trading at a 27% premium.
These sound like enormous premiums and discounts for exchange-traded products (which are supposed to stay close to their NAV). But this is by design. A premium on the Up fund indicates that the market expects the underlying index to rise between now and the maturity of these products (August 2014). Based on recent trading levels, the market expects home prices (as measured by the Case-Shiller) to appreciate by about 8.4% between now and August 2014.
The expectations implied by the current levels of UMM and DMM should make homeowners feel just a bit better about their property. An 8% gain over the next five years isn’t exactly stellar (and this certainly isn’t guaranteed), but it indicates that the situation has improved dramatically in recent months. Since early July, UMM has more than doubled, a sure sign of improved prospects. It should be noted that UMM and DMM offer 3x leveraged exposure to the Case-Shiller, so a 100% gain in share prices corresponds to a much smaller expected change in the underlying benchmark.
- MacroShares Major Metro Housing Up Trust (UMM):
- MacroShares Major Metro Housing Down Trust (DMM)
Disclosure: No positions at time of writing.