Dunno if it will go up if it stops trading today.
Falling Off an ETF Seesaw
Surge in Crude Futures Doomed Funds
Designed by Shiller to Exploit Oil Prices
By DIYA GULLAPALLI
May 10, 2008; Page B1
It sounded like a can't-miss idea: a pair of exchange-traded funds developed by a celebrity economist to track crude-oil futures.
One lets investors bet oil prices will rise, the other that they will fall.
But in recent days, creator MacroMarkets LLC announced the funds would terminate at the end of June, cashing out shareholders. This fizzle, after a year-and-a-half run, is one of the highest-profile embarrassments for the growing ETF industry over the past year.
Turns out the funds, the brainchild of famed Yale economist Robert Shiller, were too smart for their own good.
These ETFs, known as MacroShares Oil Up and MacroShares Oil Down, are baskets of assets that trade like stocks.
But they have a unique structure, which was designed to spare the funds the headache and cost of owning the actual commodities.
Instead of owning oil futures as most of its rival ETFs do, the two funds invest in short-term securities such as Treasurys and are equally collateralized at inception.
The two funds were designed to act like a seesaw. When oil rose, the securities would move from the Oil Down ETF, lowering its value, into the Oil Up ETF, raising its value.
The problem was, oil prices were about $60 a barrel when the funds made their debut in November 2006. When oil approached $120, the Oil Down ETF was almost out of money, and the funds' automatic early-termination trigger kicked in.
Under MacroShares' limits, should the settlement prices of Nymex light, sweet crude-oil-futures contracts rise to or above $111 for three consecutive trading days, then the twin ETFs must be dissolved.
That happened in April. Thus their final trading day will be June 25, with the final distribution made on July 3.
Many Oil Up investors could have done better elsewhere. U.S. Oil Fund, an ETF that similarly tracks West Texas Intermediate crude oil but without the complex structure, is up 102% in the past year, compared with 60% for the Up fund shares.
Meanwhile, holders of MacroShares Oil Down have gotten slammed, down 84%, as oil prices have surged.
MacroMarkets says it stands by the paired structure, saying it can help trade unique indexes and avoid hidden counterparty risk.
Its chief executive, Sam Masucci, has said that the products' $300 million in assets and trading volume of over three million shares per day "clearly demonstrate the market's acceptance."
Their creator, Mr. Shiller, didn't respond to requests to comment.
Partly thanks to their complex nature, the funds have been star-crossed from the beginning.
First, they had difficulty finding specialists to help trade them on the American Stock Exchange. Then the funds lost their original marketing agent, Claymore Securities.
The twin ETFs' prices stayed flat for much of 2007, even as oil went higher. Only late in 2007 did the shares start moving, as oil's ascent accelerated.
Trying to entice more investors, the sponsor split the shares, three for one, which made them more affordable.
When the Up shares are redeemed in July, investors who got in early will likely make some money.
They will be cashed out based on the underlying value and not at the lagging price of the ETF.
Anyone buying in now could make as much as 5%. For the Down shares, it's the opposite: Investors in that ETF stand to lose money.
"About the only redeeming feature of the controversial MacroShares" is "that they automatically blow up" at a certain oil-futures-contract price, wrote Greg Newton on markets Web site Naked Shorts recently.
Looked Good on Paper
MacroShares executives disagree. The idea of a commodity-linked ETF would seem to have great allure: It is cheaper, more convenient and less risky than playing with futures.
Staying in the futures game means a contract must be rolled over several times a year. And the chances of losing everything with futures are daunting.
Amid stalling ETF issuance, commodities products are one bright spot. This year, commodity-ETF assets have grown 22% through March to $31 billion, according to State Street Global Advisors. Deutsche Bank AG launched four more exchange-traded notes linked to its proprietary commodity indexes recently.
New Versions
So an undaunted MacroMarkets will try to launch new versions of the Up and Down shares based on 2008's higher oil prices. In addition, the firm is developing a separate pair of securities tracking the cost of medical inflation.
The new generation of $100 Oil Up and $100 Oil Down shares also will be susceptible to a forced closing if oil hits $185 or more for three days, or dips below $15.
Blowing through the ceiling again isn't too far-fetched. Goldman Sachs Group Inc. analysts are predicting that oil could reach as high as $200 a barrel this year.
