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Exchange-traded fund provider T-Rex Group submitted an application for its 2X Long MSTR Daily Target ETF – a product that analysts predict could emerge as the most volatile ETF in the United States – to the Securities and Exchange Commission (SEC) on Tuesday.
The Leveraged MSTR ETF
According to the company’s form N-1A, the fund aims for leveraged investment outcomes that are “significantly different from most other exchange-traded funds.”
“The Fund may carry more risk than alternatives that do not employ leverage because its goal is to amplify (200%) the daily performance of the publicly-traded common stock of MicroStrategy,” the filing indicated.
T-Rex just filed for the first-ever 2x Microstrategy $MSTR ETFs.. these are a near-lock to be most volatile ETFs ever seen in the US, will likely be in the neighborhood of 20x the volatility of SPX. The ghost pepper of ETF hot sauce. pic.twitter.com/NlUQMVTOxI
— Eric Balchunas (@EricBalchunas) June 27, 2024
MicroStrategy is a software analytics firm that has transitioned into Bitcoin development and is recognized as the largest corporate holder of BTC globally. It currently possesses over 226,331 BTC, exceeding 1% of the total supply of the network, as well as that held by the U.S. government.
Since the introduction of Bitcoin ETFs and the asset’s subsequent rise earlier this year, analysts have viewed standard MicroStrategy as functioning similarly to a leveraged Bitcoin ETF – an asset known for its extreme volatility.
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Currently, MSTR has increased by 109% year to date, compared to Bitcoin’s 37%, but it also tends to experience more severe drawdowns than BTC during market downturns.
A 2X leveraged MSTR ETF would amplify that volatility even more, doubling the daily performance of MSTR. Thus, if MSTR increases by 10% in a day, T-Rex’s ETF will rise by 20%. Conversely, if MSTR declines by 10%, T-Rex’s fund will drop by 20%.
Unprecedented ETF Volatility
The structure’s mathematics favor leveraged ETFs during times when MSTR consistently rises, often more than doubling the stock’s performance. However, downside volatility can be disastrous.
“An investor could lose the entire principal value of his/her investment within a single day if the price of MSTR decreases by more than 50% in one trading day,” the filing clarified.
“For durations longer than a single day, the Fund will incur losses if MSTR’s performance remains flat, and it is possible that the Fund will lose money even if MSTR’s performance improves over a period longer than a single day,” it continued.
As per Bloomberg ETF analyst Eric Balchunas, MicroStrategy already has a 3X leveraged ETF trading in Europe, which currently holds the title of the world’s most volatile ETF. He stated that T-Rex’s fund is likely to be the “ghost pepper of ETF hot sauce” in the United States.
“These are a near-lock to be most volatile ETFs ever seen in the US, will likely be in the neighborhood of 20x the volatility of SPX,” he tweeted on Thursday.
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