Summary MicroStrategy has shifted its focus from its enterprise software business to accumulating Bitcoin. The primary investment aim of MSTU is to deliver 200% of the daily performance of MSTR. There are potential risks to consider because of the way MSTU is structured such as rebalancing risk, sector risk, volatility and compounding risk, and counterparty risk. The intrinsic qualities of Bitcoin as a secure store of value and a long-term inflation hedge are consistent with general macroeconomic patterns of major central banks around the world implementing looser monetary policies and taking on more debt in order to sustain the economy. One company which has taken advantage of this route to currency debasement is MicroStrategy (MSTR). 4 years ago, MSTR has shifted its focus from its enterprise software business to accumulating Bitcoin. This has made MSTR a proxy for Bitcoin. MSTR currently holds 1.2% of the total Bitcoin supply. The two charts below show the percentage of price change of Bitcoin and MSTR when MicroStrategy first started acquiring Bitcoin and MicroStrategy's Bitcoin holdings over time. Data by YCharts MSTR's Bitcoin Holdings Over Time (Highcharts.com) However, in the past few months, MSTR stock price has considerably outperformed Bitcoin. Year to date, MSTR has returned 227.2% compared to Bitcoin which has returned only 59.52%. Data by YCharts One possible factor to note that the high short interest has created the possibility of a short squeeze that can propel more returns if the stock keeps trending upwards and shorts are forced to cover. Data by YCharts Therefore, will using a leveraged ETF such as T-Rex 2X Long MSTR Daily Target ETF ( MSTU ) be useful in taking advantage of short term short squeezes or just to amplify returns in MSTR and Bitcoin? It is important to note that leveraged ETFs are mainly designed for short-term momentum traders and not for long-term holding. Introducing MSTU T-Rex 2X Long MSTR Daily Target ETF is managed by REX Shares and was introduced on 18 September 2024. Therefore, the ETF is still new and has not much price history yet. The issuer is REX shares, which also offers a range of other leveraged single-stock ETFs. The primary investment aim of the ETF is to deliver 200% of the daily performance of MSTR, before fees and expenses. Data by YCharts As of 22 October 2024: Profile MSTU Fund Inception 18 September 2024 AUM $677.22 Mil Medium Bid/Ask Spread 0.37% Expense Ratio 1.05% For an ETF that is just over a month old, it has done well to accumulate an AUM of $677.22 million. Its expense ratio of 1.05% is pretty much in line with the average expense ratio of leveraged ETFs, which is 1.04% . Below is a table of the fund holdings as of 22 October 2024: MSTU Holdings (Rex Shares) The chart below compares the percentage price changes of MSTU and MSTR. With only a month's data available, it is too early to make concrete conclusions, as the volatility and compounding effects (as explained in the later section) have yet to make a noticeable effect yet. Data by YCharts How MSTU Works Since there is not much price history to compare how MSTU moves in correlation to MSTR, it will be important to know how MSTU works before considering to add it to your portfolio. A leveraged ETF is not suitable for all investors, so understanding how it works, and the potential risks are important. As mentioned earlier, the T-Rex 2X Long MSTR Daily Target ETF seeks to achieve 200% of the daily performance of MSTR, before fees and expenses. However, it is important to emphasize that the ETF is focused on the daily performance of MSTR and is not intending to deviate to a time period other than a single trading day. Therefore, the return for investors that invest for a time period longer or shorter than a single trading day may not be expected to be 200% of the performance of MSTR. In the MSTU prospectus , it is stated that the fund's principal strategies will be to “enter into one or more swap agreements with major global financial institutions” whereby the Fund will “invest in swap agreements that provide 200% daily exposure to MSTR equal to at least 80% of its net assets (plus any borrowings for investment purposes).” Additionally, the fund will also hold money market funds and short-term investment-grade debt instruments such as US government securities and repurchase agreements. At the close of each trading day, the fund advisor will rebalance the portfolio to ensure that the fund's exposure to MSTR is consistent with the ETF's 200% of MSTR investment objective. Therefore, the price movement of MSTR during the day's trading session will impact its portfolio turnover and whether the portfolio needs to be rebalanced. For instance, if the price of MSTR increases during the market trading session, this should result in the rise of the ETF's net assets, thus the ETF's exposure will need to be increased. Therefore, if one is planning to hold it for a time period longer than a day, the return of MSTU will likely be the result of the compounded return of each trading day over the period of time held. This is likely to be a different result from calculating 200% of MSTR's return for the same time period. Possible Risks with MSTU Before Investing One caveat to note that is highlighted in MSTU's prospectus is that the fund does not generally take defensive positions regardless of the market condition; and if the fund's underlying security moves more than 50% on a single trading day that is a direction adverse to the fund, the fund investors will lose all their money. Considering the volatility of MSTR and Bitcoin, this risk cannot be highlighted enough. There are also a few other potential risks to consider because of the way MSTU is structured. They are rebalancing risk, sector risk, volatility and compounding risk, and counterparty risk . We will touch on them briefly. Rebalancing risk is evident as the fund needs to be rebalanced every trading day, there is a risk that the ETF's investment exposure to MSTR may not be correlated to the investment objective. This can result in the ETF being exposed to more leverage risk than it is supposed to. With regard to sector risk , considering that MSTR is a proxy for Bitcoin. Any negative or positive news for the crypto industry can create additional volatility for MSTR and MSTU. There are no clear regulations on crypto yet, and any hints of regulation news can have an effect. This could lead to volatility and compounding risk . Volatility can exacerbate the effects of compounding. Due to the daily rebalance, there is a potential effect of compounding. This effect can mean that the performance of MSTU can be drastically different from the performance of MSTR during the same period of time. As the holding period increases, the effect of compounding can be more evident. Therefore, since the fund is just about a month old, there is not much price history to judge the compounding effect over a longer period of time. Lastly, with regard to counterparty risk, this is due to the fund's strategies to initiate swap agreements to gain 200% daily exposure of MSTR. If the counterparty becomes insolvent or affected by collateral needs, it could affect MSTU and the value of its holdings. Please review the risks of leveraged ETFs as explained in the linked SEC bulletin before making any trades in MSTU. These risks include extreme volatility, time and volatility decay, and the real possibility of losing all of your investment. Therefore, only experienced traders who fully understand the risks should trade them. MSTU: Is It Worth The Risk? Trading or investing in a leverage ETF comes with increased risks. Since there is a potential for higher volatility in MSTR and Bitcoin, which in turn can add risk because of how MSTU is structured, it is simply easier to avoid. If the fund's underlying security moves more than 50% on a single trading day that is a direction adverse to the fund, the fund investors will lose all their money. That is a statement not to be taken lightly. Considering the risks involved, it is better to just own or trade MSTR rather than MSTU.
