Macroshares housing ETF UMM and DMM close down

by Manshu on January 4, 2010

in ETF

Last July I wrote a longish post about two exotic ETPs – Macroshares UMM and DMM, which were a 3X leveraged ETP, for the housing market. These were similar to an oil ETP (UOY), which terminated early, and I am not surprised to hear that Macroshares UMM and DMM have also been terminated early.

A commenter – Bob Shreve had a clever comment on the last post:

I think these micro-niche products should have been called UMM and DMMER.

And it looks like his observation was right on the money.

A few people thought that this complex instrument can hedge their exposure to their houses, but in the end, it wasn’t much help.

I am always wary of complicated financial products and this will further push me away from them.

The Reformed Broker had a very good post about these in July, and another excellent post today. Here is what he said today:

In a screed back in July of 2009, I let loose on this misguided attempt to attract casino capital to an investment product that made absolutely no sense structurally or thematically.  These products, as created, were not a hedge against a homeowner’s own house, nor were they particularly robust enough to work as trading vehicles.

Here’s what I said at the time:

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.

The good news is that both UMM and DMM (aka Up and Down) were quietly shut down at the end of last year.  I would congratulate MacroMarkets (the funds’ creator) for doing the right thing, but upon further investigation, it turns out that there was a clause that required the funds to manage a minimum amount of capital to continue trading, which they could not raise.

The entire post is worth checking out, and just for the heck of it, if you didn’t read my earlier post, check that out to get a sense of how this product was supposed to work.

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