Summary The Defiance Daily Target 2X Long MSTR ETF targets 2x daily returns of Strategy, not cumulative 2x returns over longer periods. MSTX is down over -85% YTD, dramatically underperforming MSTR’s -40% decline due to the compounding effects of daily leverage in volatile markets. Even if MSTR doubled overnight, MSTX holders would still face a >50% YTD loss, underscoring the risks of leveraged ETFs in non-trending markets. Further declines in MSTR could result in another -90% drop for MSTX, demonstrating the potential for extreme losses in leveraged products. Thesis Leveraged ETF investors often just think about the upside and never about the downside. In the past months, the Defiance Daily Target 2X Long MSTR ETF ( MSTX ) has shown us why that is not correct. In today's article we are going to explore the ETF and its composition, its recent performance, and its outlook given its structuring. What Does the Fund Do? Let us start out by looking at the ETF's objective: The Defiance Daily Target 2X Long MSTR ETF (the “Fund”) seeks daily leveraged investment results of two times (200%) the daily percentage change in the share price of MicroStrategy Incorporated (Nasdaq: MSTR) (the “Underlying Security” or “MSTR”). Because the fund seeks daily leveraged investment results, it is very different from most other exchange-traded funds. It is also riskier than alternatives that do not use leverage. There is no guarantee that the Fund will meet its stated objective. The fund should not be expected to provide 2 times the cumulative return of MSTR for periods greater than a day. As per its objective, the ETF provides for the 2x return of Strategy ( MSTR ) on a daily basis. It is incredibly important to understand the above simple objective. A 2x daily return does not equate a 2x monthly return, nor does it equate a 2x yearly return. Let us see why. The ETF achieves its goal via swaps with large investment banks, with the non-collateralized cash parked in T-Bills: Holdings (Fund Website) We can see in the holdings file the swaps on the books and the cash position. Performance This Year Has Been Dreadful With MSTR down substantially in 2025, its 2x leveraged counterpart is down even more: Data by YCharts While MSTR is down -40% this year, MSTX is down -85%. Please note that the cumulative returns do not equal a 2x move over the contemplated period. MSTR's price action has been driven by the bitcoin plunge, as well as issues associated with the market's perception of Strategy. What is Strategy Doubles in Value Tomorrow? Strategy is currently trading at $181/share. Let us assume it doubles in value tomorrow, hence a 100% gain to $362/share. This level would be towards the top end for the name: Data by YCharts If we look at the company's price in the past few years, we can see that its top was at $450/share. Hence why a price of $362 would be towards the top of the range. Without knowing anything about finance, ETFs, or leverage, one would assume MSTX would also go towards the top of its range. Wrong. Let us do the math: MSTX is currently trading at $5.7/share A 100% return overnight for MSTR would mean a 200% return for MSTX overnight That 200% return overnight translates into a gain of $11.4/share and an ultimate price of $17.1/share MSTX, however, started the year at $35/share: Data by YCharts Even with a doubling overnight of the Strategy price, MSTX holders would still be down over -50% for the year. Why? Because of the daily 2x objective. It is extremely important to understand this feature. MSTX works best in trending markets rather than volatile directional ones. Even a violent reversal, such as a doubling in price for MSTR overnight, does not solve the year-to-date loss. MSTX holders, in fact, would need a constant re-appreciation of the MSTR stock in order to move back towards breaking even for the year. Leveraged ETFs Work Best in Uptrending Markets As a holder looking to juice up returns, an investor needs to understand that 2x leveraged products are only viable in up-trending markets. High-beta equities like MSTR usually experience violent down moves before forming a bottom. This translates into extreme losses for 2x ETFs, losses that are almost impossible to get back unless the underlying asset moves back into a bullish up-trending market. This is almost never the case since high-beta equities are cyclical. If one holds a 2x ETF on a high beta name, you are best served to sell it immediately as a technical breakdown happens in the underlying stock. One can just buy into the equity outright, and they would get a better risk reward. In our example above, MSTR holders would be flat for the year during a doubling overnight. I Am Down -85% Already, Why Sell? The interesting aspect about a 2x ETF is that a continuation in the MSTR downtrend can result in one losing another 85% of whatever cash balance is left. If we look at a long-term chart for MSTR, we get the following: MSTR price (Seeking Alpha) We can see the name with strong historic support at $100/share and resistance at $200/share. If the stock does go towards its strong support, that means another -45% down for MSTR, which translates into another -90% for MSTX of whatever balance an investor currently has. Just because you lost -85% already does not mean you cannot lose another staggering amount with a 2x leveraged ETF. Conclusion MSTX is a leveraged ETF offering the 2x daily returns for MSTR. With Strategy down -40% this year, MSTX is down over -85%. The article highlights why holders should not be complacent since a move by the Strategy stock to its long-term support level would mean another -90% down from current levels for MSTX. Even if Strategy were to double overnight, MSTX holders would still be down -50% YTD on their investment.
