High-Volatility ETF: Betting on MicroStrategy, Defiance's New MSTX Fund Pushes Market LimitsIn the U.S
High-Volatility ETF: Betting on MicroStrategy, Defiance's New MSTX Fund Pushes Market Limits
In the U.S. ETF market, known for its high-risk products, Defiance has launched a new ETF, the Defiance Daily Target 1.75X Long MSTR ETF (MSTX), aiming to offer daily leveraged returns through a bet on MicroStrategy Inc. (MSTR). This ETF is considered one of the most volatile ETFs in the market, with its high volatility stemming from MicroStrategy's massive Bitcoin holdings as a "Bitcoin shadow stock" and its 90-day volatility reaching a staggering 97%.
On March 11th, MicroStrategy announced a further purchase of 12,000 Bitcoins, investing nearly $822 million. This move once again highlights the company's unwavering belief in digital currencies and has contributed to its highly volatile stock price. In comparison, Tesla's 90-day volatility is 66%, while Nvidia's is 63%. The SPY, tracking the S&P 500 index, has a volatility of only 14%.
The emergence of MSTX further confirms the popularity of derivative-type ETFs during this year's U.S. stock market rally. These products have attracted billions of dollars in inflows due to their high returns or inverse returns, but they have also raised concerns about high-risk ETFs.
The Rise of Leveraged Single-Stock ETFs and Regulatory Challenges
MSTX is the newest addition to the category of leveraged single-stock ETFs. These ETFs apply leverage multiplier investment mechanisms to individual stocks, allowing investors to make leveraged bullish or bearish bets through purchasing these products.
In July 2022, the first leveraged single-stock ETF in the United States launched, marking the entry of U.S. ETFs into the "individual stock era." However, the U.S. Securities and Exchange Commission (SEC) has issued warnings about such ETFs that capitalize on volatility, particularly regarding risks for retail investors.
Despite this, the enthusiasm for these products from Wall Street and investors hasn't waned. Leveraged funds cover various assets, strategies, and themes, with many companies charging higher fees for related products compared to traditional ETFs.
According to Todd Sohn, ETF strategist at Strategas, leveraged single-stock ETFs have clearly resonated with traders, presenting a new frontier, especially for smaller issuers seeking to carve out a niche in this space.
Media estimates that the assets under management for single-stock ETFs have nearly doubled in the past two quarters, currently reaching approximately $85 billion. This year, these ETFs have also performed exceptionally well. For example, the two ETFs that are twice the long position of Nvidia, T-Rex 2X Long NVIDIADaily Target ETF (NVDX) and GraniteShares 2x Long NVDADaily ETF (NVDL), have achieved returns of 330% and 290%, respectively, this year. NVDL's assets have surged from around $2 billion at the beginning of the year to $5 billion.
An Arms Race in the High-Risk ETF Market
Currently, the high-risk ETF market is locked in a fierce "arms race." More and more issuers are looking to push the limits of volatility, as these products have a market.
MSTX, as the latest challenger in the market, its high volatility will undoubtedly attract investors seeking high returns. However, investors also need to be aware of the risks associated with such products. High volatility implies potential for significant gains but also carries a heightened risk of substantial losses.
The future trajectory of the high-risk ETF market will depend on investors' tolerance for high returns and high risks, as well as the regulatory stance towards these products. Regardless, the rise of high-risk ETFs reflects the market's continuous pursuit of high-volatility assets and signals that the ETF market will continue to evolve towards greater diversification and complexity.
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