Exchange-traded fund issuer T-Rex Group filed for its 2X Long MSTR Daily Target ETF – a product analysts say could become the most volatile ETF in the United States – with the Securities and Exchange Commission (SEC) on Tuesday.
The Leveraged MSTR ETF
Per the company’s form N-1A, the fund seeks leveraged investment results that are “very different from most other exchange-traded funds.”
“The Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify (200%) the daily performance of the publicly-traded common stock of MicroStrategy,” the filing stated.
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 turned Bitcoin development company that holds the mantle of being the largest corporate BTC holder on Earth. It now controls over 226,331 BTC, surpassing 1% of the total network’s supply, as well as that held by the U.S. government.
Since the launch of Bitcoin ETFs and the asset’s subsequent surge earlier this year, analysts have regarded standard MicroStrategy as operating much like a leveraged Bitcoin ETF – an asset that is already notoriously volatile.
At present, MSTR is up 109% year to date compared to Bitcoin’s 37%, but it also tends to suffer worse drawdowns than BTC during market corrections.
A 2X leveraged MSTR ETF would exaggerate that volatility even further, doubling the daily performance of MSTR. That means if MSTR rises 10% in a day, T-Rex’s ETF will surge by 20%. Likewise, if MSTR falls by 10%, T-Rex’s fund falls by 20%.
Unprecedented ETF Volatility
The arrangement’s mathematics favor leveraged ETFs during periods when MSTR consistently climbs higher, often more than doubling the stock’s performance. Downside volatility can prove catastrophic, however.
“An investor could lose the full principal value of his/her investment within a single day if the price of MSTR falls by more than 50% in one trading day,” the filing explained.
“For periods longer than a single day, the Fund will lose money if MSTR’s performance is flat, and it is possible that the Fund will lose money even if MSTR’s performance increases over a period longer than a single day,” it added.
According to Bloomberg ETF analyst Eric Balchunas, MicroStrategy already has a 3X leveraged ETF trading in Europe, which currently qualifies as the world’s most volatile ETF. He said T-Rex’s fund will likely be the “ghost pepper of ETF hot sauce” in America.
“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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