The two U.S.-listed leveraged exchange-traded funds (ETFs) designed to provide 2x daily returns of MicroStrategy (MSTR) stock, T-Rex 2X Long MSTR Daily Target ETF (MSTU) and Defiance Daily Target 2x Long MSTR ETF (MSTX), surged over 5.6% in pre-market trading on Tuesday. However, these funds have been facing significant tracking errors in recent weeks, deviating from their intended 2x exposure to the volatile software company.
According to reports, the rapid growth and massive inflows into these leveraged MSTR ETFs, with assets in the range of $2-3 billion, have 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 tracking errors on certain days.
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.
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