The Two Horsemen of the ETF Apocalypse: UMM and DMM

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Allow me to introduce you to an investment product so disgracefully ridiculous that one could only assume it was launched on a dare.

Very quietly, on June 30th 2009, some firm called MacroMarkets LLC (co-founded by the otherwise well-regarded Robert Shiller) launched two ETFs that purport to be able to give investors 300% of the return or it’s inverse of the S&P/ Case-Shiller Composite-10 Home Price Index.

In other words, buying one of these plutonium bomb experiments is supposed to let the investor grab a triple helping of whatever the housing market in 10 metro areas does in a given day. 

I’m sorry, but if you’re wondering where the line should be drawn on this stuff for sanity’s sake, it is literally right here.  Are you guys kidding me?

In case you enjoy car accidents or slow-motion trainwrecks, I’ll give you the ticker symbols:

MacroShares Major Metro Housing Up (UMM)

and

MacroShares Major Metro Housing Down (DMM)

AKA Dumb and Dumber, AKA The Two Horsemen of the ETF Apocalypse, AKA Little Boy and Fat Man (yes, a Hiroshima/ Nagasaki reference).

I’m in a rage right now over the launch of these two products and I hope those financial journalists who are able/ willing to spend the time accurately dissecting these two things will do so to the full extent if for no reason other than to prevent the needless losses that I believe both will generate at the expense of naive investors. 

Why am I so angered by the fact that these Frankenstein creations were permitted to slither out of the freakshow tent they belong under?

How about these factors for a start:

Lack of serious price discovery?  Check.

Lack of actual underlying real estate holdings?  Check.

1.25% expense ratio?  Check.

Disclaimers in the prospectus that absolve these instruments of any responsibility for not being able to perform the way they are supposed to?  Check.

“Don’t worry brah, these are triples!  You can flip ’em 5 seconds after you buy ’em!  Party on!”

Oh, and before you tell me that these products are a good way for homeowners to “hedge” the value of their own homes…I’ll ask you whether or not you believe that

a) a triple-short product truly has the ability to accomplish this objective for any period longer than one trading day?

or

b)  the housing market in Phoenix is exactly the same as the housing market in Lanford, Michigan or Quahog, Rhode Island or Smurf Village for that matter?  

How do these instruments (claim to) work exactly?  Here’s David Van Knapp‘s explanation on Seeking Alpha:

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.

Am I being Punk’d?  Is Ashton Kutcher gonna pop out from behind my Bloomberg terminal with a camera crew?

Oh, and here’s a snapshot of how Dumb and Dumber are performing today, as of this 2:15 writing on July 7th:

DMM up 9.94% on the day

UMM down 20% on the day

I see, so had you shorted both at the close yesterday, you’d be up 10% right now on the day.  Inverse my foot.  This is garbage and someone should be held accountable.

MacroMarkets has tried this type of thing already and I offer condolences for the investors who got involved with some of their other failed products.

From an otherwise-flattering portrait of Shiller in Fortune Magazine today:

MacroMarkets has been down this road before. In 2006 it offered MacroShares that tracked the rise and fall in oil prices. But in 2008, after oil prices soared from $88 to $145 in only five months — an event that the MacroShares were not designed to handle — MacroMarkets wound them down. The company introduced another pair of oil MacroShares in July 2008, but they attracted few traders and were liquidated in June.

Bob Shiller comes off like a true believer in this concept of being able to hedge everything in life, but many times, the execution of such an idealistic goal falls far short of the intention.  In this case, the execution may literally subvert the intention as these wrecking balls cut their destructive swathe though the middle class investors they are being marketed to.

How about this, I’m going to launch an ETF that lets you bet on what I’ll have for dinner tonight.  How will we achieve this goal?  Will we use spaghetti and meatball futures and arcane swaps contracts that nobody monitors?  Yeah, sure…something like that.  But don’t worry, it’ll be triple long or short, so you can coast off the volatility that the churning acids in my stomach produce as I consume the plate of food. 

Why don’t we launch ETFs based on the Boston Bruins win/loss record for the 2010 season, or how about a Jon and Kate  reconcilliation target date index-linked fund?

How about we just place a Guiness Book of World Records-sized roulette wheel on the corner of Wall and Broad and see how much more of America’s wealth we can vaporize before this decade’s end.

Is no one else disgusted?  Hello? 

Bueller?

Sources:

ETFs That Bet on Housing (Seeking Alpha)

MacroMarkets LLC Official Website

Don’t Blame Bob Shiller (Fortune)

Full disclosure:  My commentary above is not to be construed as investment advice or an invitation to buy or sell any securities.  Never trade based on anything you read here.  Especially in this particular diatribe.  The opinions expressed here are my own and not those of any other entity.  For a full disclaimer, please visit my Terms & Conditions page.

 

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  1. JTMiller commented on Jul 07

    Joshua,
    just a heads-up – your post telegraphs a fundamental misunderstanding of macroshares product design, including key differences from ETFs, many of which are favorable (unique access to the asset class that brought the global economy to its knees, meaningful price discovery potential, no compounded daily return issues, etc)

    that said, these things aren’t for everyone (what financial product is?), but I can think of many legit retail and institutional uses. Until someone finds an easier/cheaper way to express a view on/trade future U.S. home prices (and REITs, homebuilders, etc are not the same thing), I predict UMM/DMM will draw significant interest. time will tell.

    JM

    TRB: I did not communicate in this post that I’ve done any kind of extensive research, but based on everything I’ve read, my conclusion these etfs simply cannot structurally deliver anything even close to their objectives over any length of time and that this is yet another case where the marketing of what these things MAY do is light-years ahead of any real attempt to illuminate to investors what these products will more likely end up doing (a reverse stock-split just to maintain exchange listing req’s)

    good luck JM

  2. JTMiller commented on Jul 07

    Joshua,
    just a heads-up – your post telegraphs a fundamental misunderstanding of macroshares product design, including key differences from ETFs, many of which are favorable (unique access to the asset class that brought the global economy to its knees, meaningful price discovery potential, no compounded daily return issues, etc)

    that said, these things aren’t for everyone (what financial product is?), but I can think of many legit retail and institutional uses. Until someone finds an easier/cheaper way to express a view on/trade future U.S. home prices (and REITs, homebuilders, etc are not the same thing), I predict UMM/DMM will draw significant interest. time will tell.

    JM

    TRB: I did not communicate in this post that I’ve done any kind of extensive research, but based on everything I’ve read, my conclusion these etfs simply cannot structurally deliver anything even close to their objectives over any length of time and that this is yet another case where the marketing of what these things MAY do is light-years ahead of any real attempt to illuminate to investors what these products will more likely end up doing (a reverse stock-split just to maintain exchange listing req’s)

    good luck JM

  3. JTMiller commented on Jul 07

    Joshua,
    just a heads-up – your post telegraphs a fundamental misunderstanding of macroshares product design, including key differences from ETFs, many of which are favorable (unique access to the asset class that brought the global economy to its knees, meaningful price discovery potential, no compounded daily return issues, etc)

    that said, these things aren’t for everyone (what financial product is?), but I can think of many legit retail and institutional uses. Until someone finds an easier/cheaper way to express a view on/trade future U.S. home prices (and REITs, homebuilders, etc are not the same thing), I predict UMM/DMM will draw significant interest. time will tell.

    JM

    TRB: I did not communicate in this post that I’ve done any kind of extensive research, but based on everything I’ve read, my conclusion these etfs simply cannot structurally deliver anything even close to their objectives over any length of time and that this is yet another case where the marketing of what these things MAY do is light-years ahead of any real attempt to illuminate to investors what these products will more likely end up doing (a reverse stock-split just to maintain exchange listing req’s)

    good luck JM

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