(Bloomberg) — In a part of the U.S. exchange-traded fund market that has become known for increasingly risky products, a new offering that stands out from the crowd has debuted.
Defiance, a $1.4 billion asset manager, on Thursday launched the Defiance Daily Target 1.75X Long MSTR ETF under the ticker MSTX. The fund appears to provide daily leveraged returns on MicroStrategy Inc. The stock, which has been seen as a proxy for Bitcoin due to the company's holdings of the digital token, has a 90-day volatility of around 97%. That would likely make the new ETF the most volatile in the U.S., according to Bloomberg Intelligence.
By comparison, the same volatility measure is 66% for Tesla Inc. — another stock prone to significant swings — and 63% for Nvidia Corp., data compiled by Bloomberg show. For SPY, the giant State Street fund that tracks the S&P 500 Index, it's 14%.
MSTX is the latest entry in what has become a robust list of ETFs that use derivatives to provide strong or inverse returns to single companies. As stocks rumbled higher for much of 2024, these funds have grown in popularity, attracting billions of dollars and a variety of new issuers and products. But investors in MSTX will potentially face the sharpest changes of all, says Eric Balchunas of BI.
“We're currently in a hot sauce arms race as more and more issuers look to push the envelope on volatility because there's a market for it,” he said, referring to a designation he gives riskier funds.
Leveraged single-share ETFs debuted two years agoeven though US Securities and Exchange Commission officials sounded the alarm on them, especially for retail investors. While funds provide a way to capture volatility, they can also exacerbate losses. And although SEC Chairman Gary Gensler said the products “present particular risk,” assets in single-stock ETFs have nearly doubled in each of the past two quarters and currently stand at about $8.5 billion, BI estimates.
“Leverage funds tend to be used by tactical traders who understand that these funds may or may not come with increased volatility,” said Sylvia Jablonski, Defiance's chief executive officer.
The industry offers funds for all kinds of assets, strategies and themes, and companies have introduced increasingly complex products to lure money into a crowded field. Many are also able to pay more for the products given that larger competitors that typically charge less for their ETFs are not participating in leveraged and inverse funds, according to BI.
Read more from BI: ETFs' Hot Sauce Arms Race to Serve America's Most Volatile Fund Ever
“Leverage single-stock products have clearly hit the trading crowd,” said Todd Sohn, an ETF strategist at Strategas. “Vanilla equity is a high hurdle to attract flows, so this is a new frontier, especially for smaller issuers trying to make a dent in the industry.”
'mass magnet'
The stunning returns of the T-Rex 2X Long NVIDIA Daily Target ETF (NVDX) and the GraniteShares 2x Long NVDA Daily ETF (NVDL) – which have gained 330% and 290% respectively in 2024, have caught the attention of investors. Assets at NVDL, for example, have grown to $5 billion, up from about $200 million at the start of the year. This growth has inspired other issuers to try their luck.
“It's become a massive magnet for all kinds of experimental products to come to market,” Balchunas said. “NVDL charges 1.15% – you only need one hit like this to be set for life.”
For investors, a wrong bet can be incredibly painful. While NVDX and NVDL are the best-performing ETFs this year, three Nvidia inverse funds also top the list of worst performers, with losses of more than 70% each. The T-Rex 2X Inverse NVIDIA Target Daily Target ETF ( NVDQ ) is down 90% this year, the worst record for a US ETF in the entire 3,600-fund universe.
“There's a reason why the first page of this fund's prospectus is covered with disclosure in bold black letters,” Amrita Nandakumar, president of Vident Asset Management, said of the new MicroStrategy fund. “As an industry, we have a responsibility to ensure that investors understand that funds like these are meant to be short-term trading vehicles and not long-term investments.”
Read more:
Nvidia Dethrones Tesla As Single-Stock ETF King With 400% Rally
Tech ETFs that pulled in billions have been hit with losses of up to 60%
MicroStrategy became popular with retail investors in recent years thanks to it bet on Bitcoin. The firm's CEO has said the digital asset was a better investment for the enterprise software company's money than traditional staples like short-term Treasuries.
Defiance — which is known for its thematic offerings — also recently launched a dual Eli Lilly ETF. He also manages several options income products and hopes to introduce a 2x fund based on Broadcom Inc. in the following days. He has also closed several offerings, including the Defiance Treasury Alternative Yield ETF, which he ENdEd last month.