Leveraged MicroStrategy ETF down 81% since November

An exchange-traded fund (ETF) designed to offer leveraged long exposure to shares of Strategy, formerly MicroStrategy, is down approximately 81% since peaking on Nov. 20, according to The Kobeissi Letter. 

The T-REX 2X Long MSTR Daily Target ETF (MSTU) lost some 40% of its value in the past three trading sessions alone, the investment researcher said in a Feb. 26 X post. 

Shares of MSTR, Strategy’s stock, dropped roughly 20% over the same period, according to data from Google Finance. 

“Leverage ETFs are seeing massive downswings,” The Kobeissi Letter said. 

Leveraged ETFs add additional risk to MSTR and tend to underperform due to the costs of daily rebalances to maintain a leverage target. They also typically hold financial derivatives rather than the underlying stock. 

One study by GSR Markets found that in volatile market conditions — when daily rebalances are largest — leveraged ETFs lag comparable strategies by more than 20%.

Strong uptake

In September, asset managers REX Shares and Tuttle Capital Managed jointly launched two ETFs designed to provide leveraged exposure to MSTR share performance.

The ETFs — MSTU and T-REX 2X Inverse MSTR Daily Target ETF (MSTZ) — aim for two-times leveraged long and short exposure to MSTR, respectively, REX and Tuttle said.

They launched shortly after another asset manager, Defiance, clocked $22 million in volume during the first day after launching a similar ETF. 

That “may be a Day One record for a leveraged ETF,” Eric Balchunas, a Bloomberg Intelligence ETF analyst, said in an Aug. 15 X post.

Originally a business intelligence firm, Strategy transformed into a de-facto cryptocurrency hedge fund in 2020 when founder Michael Saylor started using the company’s balance sheet to buy Bitcoin (BTC).

Strategy has spent upward of $33 billion buying BTC at an average cost of around $66,000 per coin, earning an unrealized profit of more than $10 billion, according to data from MSTR Tracker.

At the peak of MSTR’s performance in November, the stock had clocked 2500% returns. As of Feb. 26, MSTR shares are down around 15% in the year-to-date, largely due to Bitcoin’s February price correction.

Magazine: BTC above $150K is ‘speculative fever,’ SAB 121 canceled, and more: Hodlers Digest, Jan. 19 – 25