Basics – CUS 10 v CUS 20

A number of people interested in following the Case Shiller indices have focused on the 20-city index. While this is a broader index, the CME contracts are on the 10-city index.  Therefore, if you’re going to trade the CUS contract, it’s important to know the differences between the two indices.

While the CUS-10 index has many of the larger cities, it is not a blanket list of the top 10.    The list to the left shows that Detroit, Dallas and Atlanta are all excluded from the CUS-10, while smaller cities such as Denver and Las Vegas are included.    Nevertheless, ten cities comprising the CUS-10 account for more than 71% of the CUS-20.

The CUS-10 has outperformed the CUS-20 since the indices were benchmarked at 100 in Jan. 2000, with the CUS-10 valued at 159.36 (as of the July release of the May indices) and the CUS-20 at 146.43.   However most of that 11.7% outperformance came in the first four years.

Since Jan 2004 the CUS-10 index has declined 2.2%, while the CUS-20 has almost matched that with a decline of 3.5%.  The oft-cited woes of Detroit and Cleveland, that are counted in the CUS-20, have been offset by the strength of cities in the Northwest (Portland and Seattle.)

Furthermore, since the CUS-10 accounts for such a large percent of the CUS-20, it shouldn’t be surprising that the two move together.  Since less than 30% of the CUS-20 doesn’t overlap with the CUS-10, you’d need some pronounced movements in the remaining ten cities for the indices to diverge dramatically.

The other major difference (than size) between the two indices is kind of red state vs. blue state syndrome.  That is, the CUS-10 has three cities from the Northeast, and three cities from California.  The “other” ten cities in the CUS-20 index tend to be more Mid-America with exposures to the Southwest (Dallas, Phoenix), the Southeast (Charolette, Atlanta, and Tampa), and a broad definition of the Mid-West (Cleveland, Detroit and Minneapolis).

Any pronounced difference in performance between the CUS-10 and CUS-20 index would have to be based on these two features: size and location.  Given some extreme risks(earthquake, terrorism, rising sea levels) one might find fewer risks in the CUS-20 index.  On the other hand, as globalization continues, or foriegnors look to invest in US real estate, the larger cities might outperform.  While the smaller cities might have more low-income borrowers, at least there’s lending going on to non-jumbo clients.  Who’s going to lend $1mm on a starter home in Palo Alto?

Net, I’d be surprised to see big differences over the next few years.