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MacroShares are fully-collateralized equity securities that deliver the returns (or inverse returns) of
important asset classes and valuable economic interests. As listed, exchange-traded securities they can be
purchased or sold throughout the trading day.
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Although there are some similarities, they differ in several important ways:
• MacroShares are structured as trusts. They are exchange traded products registered under the Securities Act of 1933 and the Securities Exchange Act of 1934, and are subject to SEC prospectus delivery and periodic reporting requirements. MacroShares represent an undivided interest in the assets of a trust. Trust asset balances change over time according to movements in the reference index, and they generate interest income from short-term U.S. government obligations and repurchase agreements held as collateral. In contrast, ETFs are structured as investment companies under The Investment Company Act of 1940, and must purchase, hold and manage financial instruments in order to replicate an index. ETNs are unsecured promissory notes.
• Every MacroShares product strategy is comprised of a pair of securities that trade separately in the secondary market: “Up” and “Down”. The “Up” security holders own an economic interest in the upward movement of a reference index; the “Down” security holders own an economic interest in the downward movement of the same reference index.
• Unlike traditional exchange-traded funds (ETFs), MacroShares are typically issued with terms of 5-20 years, and among other factors, market prices generally reflect expectations of reference index returns over intermediate and long-term investment horizons. MacroShares terminate prior to stated maturity in the event that the reference index falls below or rises above specified levels. Please read the applicable prospectus for further information concerning early termination triggers and other important details.
• Unlike exchange-traded notes (ETNs) and ETFs, MacroShares investors bear no issuer credit risk and no hidden counterparty risks. MacroShares investments are fully-collateralized by short-term U.S. Government obligations, overnight repurchase agreements secured by Treasuries and cash.
• In addition to capital return potential, MacroShares automatically deliver quarterly net income when the interest earned on trust collateral exceeds all trust expenses.
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“Paired” issuance is a fundamental aspect of the MacroShares structure. This arrangement is consistent with aspects of other risk transfer instruments. For example, in a futures market, for every “long” contract, there is a simultaneous offsetting “short”; in a swap market, one party simultaneously commits to pay what the counterparty agrees to receive and vice-versa. However, unlike a swap, a MacroShare is exchange-traded and entails no counterparty or credit risk. Additionally, swaps and futures instruments may be less suitable, or even non-permitted, for certain investors and risk managers. MacroShares enable both individual and institutional investors to rebalance their risk portfolio without the costs, tax consequences, added complexity and documentation that futures or swaps can entail.
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No.
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The UV of MacroShares offer efficient tracking (and inverse tracking) of their reference index, provided that the trusts generate income from its short-term investments that covers trust expenses.
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At any moment in time, UV reflects the current “book value” of the security if it were terminated and redeemed . The UV is derived from the historical path of the “spot” reference index as it migrates from its level on the fund inception date, along with any trust net income that has accrued.
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• The expected return (or expected inverse returns) of a reliable reference index over the expected remaining life of the security, and
• A stream of periodic income distributions (as available), generated from interest on the short-term U.S. Treasury securities and repurchase agreements for U.S. government obligations held by each trust, net of trust expenses.
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It is important to remember that unlike traditional exchange-traded funds (ETFs), MacroShares are typically issued with terms of 5-20 years. Although UV will offer efficient tracking (and inverse tracking) of the reference index, the market prices of MacroShares can reflect, among other factors, expectations of reference index returns and interest rates over intermediate or long-term investment horizons. Thus, at any moment in time, market prices will reflect both the current UV, and the expected path, or “future performance”, of the reference index over the remaining life of the MacroShares, along with the attendant trust net income that will accrue based upon trust collateral balances. Consider MacroShares $100 Oil Up (UOY) and Down (DOY): When the prices of longer-dated futures contracts are higher than the front-month future, the market anticipates higher oil prices in the future (a “contango” market). This price premium can range from less than one percentage point to several percentage points. Because of this, UOY could trade at a premium to reflect the expectation of higher oil prices in the future, while DOY could trade at a discount to reflect the inverse of that expectation. When the prices of longer-dated futures contracts are lower than the front-month contract, the market expects lower oil prices in the future (a “backwardated” market). This price discount can also range from less than one percentage point to several percentage points. Because of this, UOY could trade at a discount to reflect the expectation of lower oil prices in the future, while DOY could trade at a premium to reflect the inverse view.
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The paired trust structure permits the pledging (through settlement contracts and income distribution agreements) of short-term U.S. Treasuries and short-term collateralized repurchase agreements (“short-term investments”) along with accrued income between the MacroShares “Up” and “Down” trusts. Thus, safe, liquid, interest-earning assets shift between the “Up” MacroShares trust and the “Down” MacroShares trust over time, according to a predetermined formula that is driven by changes in the reference index. Please refer to the prospectus for additional details.
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Net income is calculated from the interest earned on the short-term investments held in the MacroShares trusts, net of trust expenses. Several factors will impact distribution amounts (if any), including interest rate movements and changes to the reference index price. Income is accrued daily based on the underlying value of each trust, with any payments made quarterly. Unlike certain other exchange-traded products, to the extent that any net income is generated, it is automatically paid out to you, the investor.
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Each MacroShares issue can entail different costs, and total per-share expenses can diminish over time as trust assets grow. Further, in any given period, trust income may completely offset or exceed expenses. Please refer to the applicable MacroShares prospectus for more details.
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MacroShares are publicly-traded partnerships. Income derived from your MacroShares investment and distributions will be reported on a Schedule K-1. Income dirived from United States Government Securities is exempt from state and local income taxes; income from repurchase agreements is not. Gains or losses on sales of shares are treated as capital gains or losses, with long-term capital gains treatment potentially available. However, you should always consult your tax advisor to understand your specific tax situation.
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Yes, MacroShares are both short-sale eligible and margin eligible.
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MacroShares are a relatively new security structure, and may be linked to assets classes or economic indictors that otherwise have limited access and/or liquidity. Generally, as the number of MacroShares outstanding and market participants increases, bid/offer spreads should diminish, making the market more efficient. As with any security, always use prudent judgment when entering buy and sell orders, using limit orders whenever possible.
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• Retail & Institutional Investors
MacroShares can be bought and sold on any trading day through most brokerage accounts. Like traditional stock transactions, investors buying or selling MacroShares on an exchange may incur brokerage costs and other transaction fees.
• Authorized Participants & Institutional Investors
Shares may only be purchased from, or tendered for redemption to the relevant MacroShares trust by Authorized Participants in blocks of 50,000 shares, and only together with the same number of shares from the companion (“Up” or “Down”). Deadlines for placing creation and redemption orders each day apply, and can vary by product (e.g., for MacroShares $100 Oil, creation or redemption orders must be placed at least 30 minutes prior to the close of NYMEX trading).