A pair of exchange-traded funds offering the first direct access to the S&P Case-Shiller Composite-10 Home Prices Index is set to launch on April 27, according to new filings with the Securities and Exchange Commission.

The MacroShares Major Metro Housing Up and the MacroShares Major Metro Housing Down ETFs will trade on the New York Stock Exchange's Arca platform. The long version will go under the ticker "UMM" while the short-positioned ETF will be marketed under the "DMM" symbol.

The funds aim to provide 300% and -300% of the returns of the benchmark index, which is one of the most closely followed benchmarks of residential housing prices.

Fact sheets submitted by the funds' adviser, MarcoMarkets LLC, to the SEC on April 7 specified the launch date. Calls to the company requesting comment about the impending launches weren't returned.

The fact sheets noted that each fund would come with an expense ratio of 1.25%. In addition, the filings provided new details regarding the funds' allocations as represented by their underlying benchmarks. At inception, the S&P Case-Shiller Composite-10 Home Prices Index composition is expected to appear as follows:

• New York at 27.2%

• Los Angeles at 21.2%

• San Francisco at 11.8%

• Chicago at 8.9%

• Washington, D.C., at 7.8%

• Boston at 7.4%

• San Diego at 5.5%

• Miami at 5%

• Denver at 3.7%

• Las Vegas at 1.5%

Interestingly enough, the fact sheet also lists correlations to other major asset classes. The highest is stated as REITs at 0.34. Stocks are at 0.08 and commodities 0.17. (Of course, 1.0 would be a perfect correlation; 0.00 is uncorrelated.)

How They Work

Much like earlier versions of MacroShares, the new ETFs will have an "up" and a "down" version, embracing what is commonly referred to as the MacroShares "teeter-totter" structure. Under this structure, the new ETFs are offered in equal numbers of up and down shares. This paired structure is what allows the MacroShares to be tied to illiquid markets like housing.

The only asset the ETFs hold is Treasuries. Those Treasuries are simply shifted from one fund to another depending on the price point of the index. If home prices go up, assets are shifted from the Down Macro to the Up Macro, and vice versa.

Because they hold Treasuries, the new funds also provide income: Both the Up and Down Macros earn interest income, which should add about 4% to annual returns at current interest rates.

There are a few quirks.

Like all Macros, the funds are limited in how far they can move. Because they work like a teeter-totter, the down fund can only fall 100% (reflecting a 33% drop in house prices), while the up fund can only rise 100% (reflecting a 33% rise in home prices). After that, the funds will be liquidated and investors will be paid based on the net asset value.

The funds also have a planned expiration five years from now.

It's important to understand where the funds will trade vis-a-vis the index. The S&P Case-Shiller indexes are reported on a monthly basis, with a two-month lag, and each reading reflects average prices over a three-month period. That is, the June index price reflects home prices for the three months ending in April. The funds' net asset values will be based on this lagging index price.

Investors, however, will likely look forward when establishing the market price for the funds, using not just the index value but also expectations for where that value is heading. The funds will likely trade somewhat like a long-term future on housing prices, reflecting a bet on medium- to long-term trends in home price movements.

The prospectuses for each ETF can be found here. The most recent filing through fact sheets can be viewed here as well as here.

The IPO Process

Historically, ETF companies have relied on what's called "seed capital" to launch new ETFs. Specialists-professional market makers who are paid to ensure that ETFs trade in a liquid fashion-put up the initial money needed to create the first few shares of the ETF. Then, once trading begins, new shares are created on demand.

But something happened after 2004 that caused seed capital to dry up. A variety of explanations have been offered: smaller spreads, new regulations, fewer blockbuster products, etc. For whatever reason, specialists became very reluctant to seed new ETFs. This has gotten worse recently, as the credit crisis has put an extra premium on cash.

It's a big problem for the ETF industry, and MacroShares thinks it may have the solution.

MacroShares is planning to launch its new house-price ETFs using a unique "open IPO" process. Rather than having specialists provide seed capital, MacroShares will allow broker-dealers-any broker-dealer who registers with MacroShares-to sell shares directly to investors prior to the launch. Those underwriters will be compensated in two ways:

1. Investors will be charged a per-share commission of 0.4% to 1.8% depending on the number of shares sold, which will be paid to the broker-dealer.

2. Broker-dealers will receive a pro-rata portion of the total expenses paid to the fund forever.

It is hoped that this will allow the company to raise a large sum of money with which to launch the products.

The estimated price range for the securities is between $28 and $42 per share in the 10-day auction process, according to earlier filings about the process. A more detailed analysis of the MacroShares' auction process and its chances of success can be found here.