Monday, April 6, 2009

A New Way to Bet Against (or for) the House

By Velida Alemic

Innovation is a dirty word in financial circles these days. But it is hard not to tap into a market worth over twice the capitalization of all U.S. stocks.
Despite spectacular falls, U.S. residential real estate was still valued at $18.3 trillion at the end of 2008, according to the Federal Reserve. Yet as many a homeowner has found, bricks and mortar isn't the most liquid asset class. A new exchange-traded fund, expected to be launched this month, is designed to help change that. Will it catch on?
MacroShares' Major Metro Housing product, brainchild of economist Robert Shiller, will offer investors a way of betting on rising house prices by buying "Up" shares, or expressing pessimism via "Down" shares. Unusually, these won't be backed with the underlying physical housing assets.
Instead, MacroShares will be tied to the Standard & Poor's/Case-Shiller Composite 10 Home Price index. When the Up and Down shares float, proceeds will be invested in U.S. government bills to ensure liquidity. If the index moves up, the trust behind the Down shares will shift a corresponding portion of its assets to the Up shares trust, raising the net asset value underlying the Up shares. The prices should follow.

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