The T-Rex 2X Long MSTR Daily Target ETF (MSTU) and Defiance Daily Target 2x Long MSTR ETF (MSTX) surged over 7.5% in pre-market trading on Tuesday, but the funds have been grappling with significant tracking errors in recent weeks. These ETFs aim to provide twice the daily returns of MicroStrategy (MSTR), the software firm known for its massive Bitcoin holdings.
The rapid growth of MSTU and MSTX, with assets in the range of $2-3 billion, has made it challenging for ETF issuers to accurately replicate the 2x daily MSTR returns. The funds have been forced to rely more on options rather than swaps for exposure, leading to noticeable deviations from their intended performance.
Experts cite MSTR's relatively small market cap compared to the size of these ETFs as a key factor, making it difficult to source enough swaps and options to hedge the exposure efficiently. Additionally, MSTR's high volatility exacerbates the tracking challenges when using options. Some analysts argue that MSTR is simply too small to accommodate the trading volume and assets under management in these products, raising concerns about a potential structural issue in the ETF industry.
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