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ETF-Volatility Race Heats Up on 200% Leveraged MicroStrategy Bet

(Bloomberg) -- An ETF that just last month was dubbed the most volatile to ever hit Wall Street has already been upstaged, after the debut of a competing product that adds even more leverage.

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The T-REX 2X Long MSTR Daily Target ETF (ticker MSTU) began trading Wednesday, promising to provide two times the daily performance of MicroStrategy Inc. shares, or 200% leverage in industry parlance. The fund, issued by REX Shares and Tuttle Capital Management, gives even more leverage on MicroStrategy than the ETF known as MSTX. The latter, from Defiance, launched in mid-August and was deemed the most volatile ETF in the US by Bloomberg Intelligence at the time.

MicroStrategy has been seen as a proxy for Bitcoin because of its holdings of the digital token. It has a 90-day volatility of about 88%, underscoring the sharp swings MSTU holders face. For comparison, Nvidia Corp. has a 90-day volatility of 63% and Microsoft Corp. 20%. The MSTX ETF, meanwhile, in the limited time it’s been trading, has a 20-day volatility of roughly 150%, data compiled by Bloomberg show.

MSTU is the latest entry in a booming market for ETFs that use derivatives to offer juiced-up or inverse returns on single companies. REX Shares on Wednesday also launched MSTZ, which provides 200% inverse exposure to MicroStrategy’s daily moves.

The offerings mark “a milestone” in the arms race for riskier ETF products, said Bloomberg Intelligence’s Eric Balchunas. “It will instantly be the most volatile product available in the US.”

Matthew Tuttle, chief executive officer of Tuttle Capital, called the new fund a “first-of-its-kind,” and acknowledged that the offerings stand to be “the most volatile ETFs in the US.”

Cash Draw

Leveraged single-stock ETFs targeting hot tech stocks such as Nvidia have raked in money this year, with the GraniteShares 2x Long NVDA Daily ETF (NVDL) taking in $3.5 billion, data compiled by Bloomberg show. Its assets have grown to $4.6 billion. Meanwhile, the uber-leveraged MicroStrategy fund from Defiance — MSTX — has seen inflows of more than $200 million since its debut.

Sylvia Jablonski, chief executive officer of Defiance, said MSTX was “a first mover” and had a successful launch, judging by its asset growth. She also pointed out that the fund this week saw its highest trading day yet. Defiance has filed to raise the leverage on its MicroStrategy fund to 2x from 1.75x.

Leveraged single-stock ETFs debuted two years ago, even as US Securities and Exchange Commission officials sounded the alarm on them, particularly for retail investors. While the funds are a way to tap volatility, they can also compound losses. SEC Chair Gary Gensler said the products “present particular risk.”

“I have to think 2x MSTR ETFs will be primarily adopted by retail traders looking for leveraged Bitcoin plays,” said Dave Lutz, head of ETFs at JonesTrading. “As long as they understand the risks involved and make educated decisions about how long to hold them, it certainly gives them a new option for playing crypto.”

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