SEC Receives Application for MicroStrategy MSTR ETF with 2X Leverage

SEC Receives Application For 2X Leveraged MicroStrategy (MSTR) ETF


By Andrew Throuvalas
Latest update:
June 28, 2024, 15:19 EDT
|
Reading time: 2 minutes


Source: AdobeStock / photo_gonzo
T-Rex Group, an exchange-traded fund issuer, officially submitted an application with the Securities and Exchange Commission (SEC) on Tuesday for its 2X Long MSTR Daily Target ETF. Analysts anticipate this product to potentially emerge as the most volatile ETF in the United States.
The Leveraged MSTR ETF
According to the details outlined in the company’s
N-1A form
, the fund is designed to deliver leveraged investment outcomes that set it apart from most other exchange-traded funds.
The filing specified, “The Fund may carry more risk compared to non-leveraged alternatives due to its objective of amplifying (200%) the daily performance of MicroStrategy’s publicly-traded common stock.”
MicroStrategy, a company initially focused on software analytics but now deeply involved in Bitcoin development, currently boasts the title of the largest corporate BTC holder globally. It commands a portfolio exceeding 226,331 BTC, surpassing 1% of the total network’s supply, including that held by the U.S. government.
With the introduction of Bitcoin ETFs and the subsequent surge in the asset earlier this year, analysts have likened standard MicroStrategy to operating akin to a leveraged Bitcoin ETF – an asset already notorious for its volatility.
Presently, MSTR has surged by 109% year-to-date, outpacing Bitcoin’s growth of 37%, but it also tends to experience more severe downturns compared to BTC during market corrections.
The proposed 2X leveraged MSTR ETF would intensify this volatility further, doubling MSTR’s daily performance. For instance, if MSTR climbs by 10% in a day, T-Rex’s ETF would rise by 20%. Conversely, if MSTR drops by 10%, T-Rex’s fund would decline by 20%.
Unprecedented ETF Volatility
The mathematics of this arrangement lean towards favoring leveraged ETFs during periods marked by consistent upward movement in MSTR, often resulting in more than double the stock’s performance. Nevertheless, downside volatility can prove calamitous.
The filing cautioned, “An investor might face the complete loss of the principal investment within a single day if MSTR’s price plunges by over 50% in one trading day.”
“Over periods extending beyond a single day, the Fund may face losses in situations where MSTR’s performance remains stagnant. It is plausible for the Fund to incur losses even if MSTR’s performance improves over an extended timeframe,” it further elaborated.
As per Bloomberg ETF analyst Eric Balchunas, MicroStrategy already boasts a 3X leveraged ETF actively traded in Europe, currently holding the reputation as the most volatile ETF globally. He mentioned that T-Rex’s fund is likely to become the “ghost pepper of ETF hot sauce” in the U.S.
“In all likelihood, these will be the most volatile ETFs ever observed in the U.S., potentially close to 20 times the volatility of SPX,”
he tweeted on Thursday
.
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