Firm plans to launch four credit default swap ETFs

Providers of exchange traded products are developing investments that give investors the ability to more accurately pinpoint risk. CCM Partners LP of San Francisco, which does business as the California Investment Trust Fund Group, filed papers with the Securities and Exchange Commission on Jan. 28 to offer four exchange traded funds that track credit default swap contracts. A credit default swap, or CDS, is a type of derivative that is essentially a form of insurance against a company's defaulting on debt. Typically, the swap buyer pays a quarterly fee to the seller. In exchange, the seller agrees to make a payment to the buyer in the event of a default. Investing in credit default swaps give investors a "pure" way of investing in credit risk, said Jeff Ptak, director of exchange traded securities analysis at Morningstar Inc. of Chicago. The proposed ETFs would be the first product to give investors easy access to such contracts, he said. Macro Inflation Depositor LLC of Madison, N.J., a subsidiary of MacroMarkets LLC, filed papers with the SEC on Jan. 25 to offer two new exchange traded trusts: the MacroShares Medical Inflation Up Shares and MacroShares Medical Inflation Down Shares. The proposed trusts — which closely resemble ETFs — would track the movements of health care inflation, as measured by the health care segment of the consumer price index. To track the index, the trusts will invest in Treasuries and enter into multiple forward contracts and a swap agreements with each other. The result will be a constant shifting of Treasuries back and forth be-tween the two in an attempt to mimic the percentage changes in the index. As a result, the trusts — without actually investing in health care securities — offer investors a pure way of betting on the risk that health care costs will go up or down, Mr. Ptak said. The proposed products are exciting because they will allow investors to "more closely calibrate risk," he said. "I really do think we're going to see more of these products," Mr. Ptak added.

SKEPTICISM ABOUNDS

Other industry experts, however, are dubious. One major issue with the proposed products is that they seem overly complicated, said Herb Morgan, president of Efficient Market Advisors LLC, a San Diego-based firm with $1.3 billion in assets. The new funds are unlikely to appeal to "everyday Americans," said Mr. Morgan, whose firm relies almost exclusively on ETFs. "I wouldn't use them." Because the products are in registration, officials from CCM Partners and MacroMarks declined to comment. MacroMarkets, however, has tried its hand at MacroShares before, with mixed results. With Claymore Securities Inc. of Lisle, Ill., acting as marketing agent, the Claymore MacroShares Oil Up Tradable Trust, and Claymore Macro-Shares Oil Down Tradable Trust were launched in November 2006.

PARTNERSHIP DISSOLVED

The partnership was dissolved, however, in November 2007, and Claymore's name was removed from the trusts. Industry experts have speculated that the split had to do with the fact that MacroShares surprised almost everyone by trading at wide discounts and premiums to net asset value — something few investors thought would happen. ETFs typically do not trade at wide discounts or premiums, and it was thought MacroShares — although not technically ETFs — would act in much the same manner. MacroMarkets maintains that its split with Claymore was amicable. Claymore — which has 29 exchange traded products, and more on the way — asked MacroMarkets to take on the marketing of Macro-Shares because it "only had so many resources," said Robert Tull, a managing director at Macro-Markets. As to the viability of Macro-Shares, once investors are "educated" about how they work, investors will be more likely to see their benefits, he said. But MacroShares — because they can trade at wide discounts and premiums — appear to be based on "an imperfect structure," said Matt Hougan, editor of IndexUniverse.com of New York.

BEYOND THE STRUCTURE

It remains to be seen whether investors will be able to look beyond that, he said. And because the new ETF prospectuses are so difficult to understand, Mr. Hougan said he didn't see any but the savviest investor using them. "You could see more of these products, but I'm a little skeptical," he said. E-mail David Hoffman at dhoffman@investmentnews.com.