MicroStrategy ETFs: When the Boom in the Crypto Corner of the ETF World Reaches its Limits

In the ETF universe, not all that glitters is gold. The remarkable success of betting on the Bitcoin-investing giant MicroStrategy has uncovered rare challenges in a specialized niche of the global $15 trillion ETF market. While the rapid growth in the ETF sector has mostly been smooth, two US-listed leveraged MicroStrategy ETFs are showing unexpected deviations in performance returns. T-Rex 2x Long MSTR Daily Target ETF (MSTU) and Defiance ETFs' Daily Target 2x Long MSTR ETF (MSTX) sometimes deliver unexpected surprises instead of the hoped-for gains. On November 21, MSTU recorded a loss of 25.3 percent, although the stock slide of MicroStrategy in question should have made an even larger dent. A key reason for these fluctuations seems to lie in the growing size of these ETFs. These ETFs have ridden the Bitcoin boom, causing their appeal to soar and now pushing them to the limits of the supply range of the total return swaps their brokers can provide. Emergency solutions such as using call options do not offer a perfect replication of price movements. Market rivals argue this is a specific issue of MicroStrategy ETFs, not of ETFs in general. The ETFs hold indirect exposure worth over 10 percent of MicroStrategy’s market capitalization. Given MicroStrategy’s volatile nature, the CEO of Roundhill Investments warns that these ETFs are reaching their limits of resilience. Some suggestions for improvements include limiting the creation of new units to present a more accurate real-time value—regardless of resistance from the US Securities and Exchange Commission. In light of these challenges, industry experts regard the case as a learning example. If future ETFs face similar difficulties due to their unforeseen growth, they are simply not built for success. The decision for product growth over accuracy seems to be the favored strategy at the moment. However, this too may show the first signs of wear.