TL;DR
The strong performance of MicroStrategy’s stock has increased the demand for leveraged ETFs, causing prime brokers to reach their limits in swap exposure.
The T-Rex 2X Long MSTR Daily Target ETF (MSTU) has faced high volatility, which forced its creator, Matt Tuttle, to resort to options due to a lack of coverage from brokers.
MicroStrategy’s leveraged ETFs surpassed $4 billion in assets.
The spectacular performance of MicroStrategy Inc.’s stock has generated an increase in the demand for leveraged exchange-traded funds (ETFs) linked to the company, leading prime brokers to face limits on their willingness to offer swap exposure, a crucial tool used in these funds.
The T-Rex 2X Long MSTR Daily Target ETF (MSTU), launched by Matt Tuttle, has been one of the most affected by this phenomenon, experiencing extreme volatility since its debut. Despite the challenges, Tuttle has opted to buy options to meet the fund’s leverage targets, as prime brokers, due to the instability of MicroStrategy’s stock, were unable to cover the swap demands.
ETFs Are at the Limit
The MSTU ETF, which offers double the return on MicroStrategy’s stock, attracted hundreds of millions of dollars in mid-October. However, due to the risks associated with the company’s stock, most brokers reached their limits in swap exposure, forcing Tuttle to seek alternative solutions to meet the leverage goals. Meanwhile, a rival fund, the Defiance Daily Target 2X Long MSTR ETF (MSTX), had to deal with similar situations, beginning to use options shortly after its launch to adjust to the growing demand.
MicroStrategy’s Stock Rose More Than 70%
The high volatility of MicroStrategy’s stock has highlighted the tensions in the risk limits of prime brokers. The company, which is the largest corporate holder of Bitcoin, has seen its stock price rise more than 70% since early November, partly due to the record Bitcoin purchase announced by the company. This surge has increased pressure on the ETFs, whose combined assets have nearly reached $4 billion.
Leveraged ETFs linked to individual stocks, such as those of MicroStrategy, were launched in 2022 and quickly attracted individual investors, often drawn by the potential for quick profits. However, the risks inherent in these products must be considered due to their volatility. Brokers handling these funds must conduct rigorous risk assessments, especially when dealing with such unstable assets
