Investors have enthusiastically poured billions of dollars into two highly leveraged ETFs associated with MicroStrategy Inc., known for its aggressive Bitcoin investments. The T-Rex 2X Long MSTR Daily Target ETF and the Defiance Daily Target 2X Long MSTR ETF now manage a collective $5 billion in assets, demonstrating the market's enthusiasm for Bitcoin's recent surge. These funds are designed to double MicroStrategy's daily stock returns, bringing about significant risks due to their leveraged nature and potential for underperformance.
MicroStrategy, a company holding around $35 billion worth of Bitcoin, has witnessed its market capitalization soar to almost $90 billion, more than doubling the value of its cryptocurrency holdings. Analysts attribute this surge to investor optimism and speculate that the leveraged ETFs are contributing to the stock's rapid ascent. However, skeptics caution that this level of excitement may not be sustainable and could pose risks for investors due to the complexities involved in these funds’ strategies and MicroStrategy's exposure to Bitcoin.
The leveraged ETFs targeting MicroStrategy aim to achieve twice the daily return of the company's stock but have recently fallen short in performance expectations. On days when MicroStrategy's stock rose by 9.9%, the T-Rex ETF only gained 13.9%, well below the anticipated 19.8%. This discrepancy has left investors like Jesse Schwartz frustrated, as they face amplified downside risks without corresponding rewards on the upside. The complexity of these single-stock ETFs, a new investment tool introduced in 2022, has allowed retail investors access to leveraged strategies previously reserved for professional traders. While ETFs focusing on companies like Tesla and Nvidia have successfully mirrored their intended 2x returns, the MicroStrategy funds have encountered challenges in keeping pace.
Managers overseeing the T-Rex ETF and the Defiance ETF have struggled to secure swap contracts, the primary financial instruments leveraged ETFs use to track their targets. The limited access to swaps has forced fund managers to turn to options markets as an alternative, introducing higher volatility and imprecise outcomes. This shift to options has resulted in difficulties in achieving the desired 2x outcomes, as stated by Matt Tuttle of Tuttle Capital Management and Sylvia Jablonski, CEO of Defiance ETFs, highlighting the added volatility and market distortions stemming from ETFs' reliance on options.