The main difference between ETFs/ETNs and other investment vehicles, particularly closed-end funds, is the ability to keep market price and Net Asset Value (NAV) closely aligned. The process is actually quite simple: ETFs have “authorized participants” with the ability to exchange shares of the underlying asset for shares of the ETF (when the ETF is trading at a premium) and vice-versa. This arbitrage mechanism is key to keeping the market price and the NAV closely aligned.
Funds from MacroShares, however, are not trading at NAV (Net Asset Value). MacroShares $100 Oil Down Shares (DOY) is trading at a -12% discount to NAV and MacroShares $100 Oil Up Shares (UOY) is trading at a +33% premium to NAV. This is characteristic behavior of closed-end funds, not ETFs.
So why are MacroShares trading at such large discounts/premiums to NAV? For starters, it’s because they told us this would happen. The UOY fact sheet states:
“For all MacroShares products, premium and discounted market prices (relative to underlying value) are normal. These market prices reflect supply and demand, as well as factors that the prices of other exchange-traded products may not be affected by, including investor expectations for Reference Index performance over the remaining term of the security.”
MacroShares, sometimes referred to as the teeter-totter trade, always come in pairs. For every “up” share there is a corresponding “down” share. The quantity of “up” shares is equal to the quantity of “down” shares; both have 1.7 million shares outstanding. While they do utilize authorized participants, there is no independent creation and redemption of shares. As the prospectus says, “The Down MacroShares may be redeemed on any business day only together with Up MacroShares (as defined in this prospectus) in MacroShares Units and only by holders who are authorized participants.”
MacroShares has another document titled Exchange-Traded Crude Oil: Alternative Vehicles that puts MacroShares in a category of their own – not ETFs, not ETNs, not futures, but MacroShares. Whatever they really are, MacroShares are usually categorized as ETFs. That is how Morningstar, IndexUniverse, Ned Davis Research, and a host of other sources have classified them also.
MacroShares have other problems too. A quick check of my quote screen shows UOY with a bid of $3.26 and ask of $3.39 (a 4% spread) and DOY has a bid of $8.25 and ask of $8.40. That’s correct – there is no volume and there is no liquidity, not withstanding their feeble attempt to increase volume with a share-split recently.
Therefore, to answer the question – No, MacroShares are not ETFs. However, I’m not sure they should be classified as closed-end funds either, although they certainly act more like closed-end funds than ETFs.
Disclosure: no positions