In the ETF world, which MacroShares strives to be a part of, low expense ratios are expected. Those in excess of 1% typically receive harsh criticism. Most sponsors recognize this fact and work tirelessly to reduce fees and cap expenses for their shareholders. MacroShares took a different route, selfishly imposing an annualized expense ratio exceeding 12.5% for its own benefit.
Last week I wrote an article on the early termination of MacroShares Major Metro Housing Up (UMM) and Down (DMM). In it, I mentioned that I did not know the fair prices for the pair, but there was a potential trade since the combined prices added up to only $46.11 instead of the expected $50.00. MacroShares are based on a teeter-totter arrangement, whereby the underlying values undergo equal but inverse movements. Their combined value is therefore supposed to remain constant except for expenses.
I went looking for a trade, but what I found instead was the most outrageous expense ratio ever. At the June 30 launch, the NAVs were $20.02 for UMM and $29.98 for DMM. As expected, the two NAVs added up to $50.00 as part of the teeter-totter arrangement. As of December 21, the NAVs were $22.68 for UMM and $25.87 for DMM. Those “pre-termination” NAVs add up to only $48.55. Each of the pair lost 2.9% in less than six months due to daily expenses.
According to the press release, the underlying values of both UMM and DMM will also bear the early termination fees, expected to range from $0.85 to $0.90 per share. The early termination expenses will accrue ratably starting December 22 and going through December 28, the last day of trading. Since the termination values are to be based on the November 24, 2009 release of the S&P/Case-Shiller Composite-10 Home Price Index, all fluctuations in the NAVs during this period are expense related.
Subtracting 85-cent termination fees yields the anticipated liquidation NAVs of $21.83 for UMM and $25.02 for DMM. Their expected combined value of just $46.85 represents expenses of $3.15, or 6.3%, in less than six months. On an annualized basis, the expense ratio is in excess of 12.5% for UMM and DMM.
This is beyond outrageous. It is obscene. The teeter-totter is broken. Where are the directors that are supposedly looking out for the interest of the shareholders?
The prospectus contains 15 hypothetical examples. The worst case expenses used in any of these examples is $0.095 (less than a dime) per share per quarter for a 1.52% annualized expense ratio. Additionally, all 15 hypothetical examples show a combined value of $50 for the pairs for all quarters and all years. Maybe I am missing something, but it sure looks like more misleading marketing material to me.
Last Thursday (12/24/09), I purchased an equal number of shares of both UMM and DMM. I intend to go through the liquidation and early termination process and will report back with the results.
Disclosure covering writer, editor, publisher, and affiliates: Long UMM & DMM. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.