The ETF industry’s shark-jumping moment

What fresh hell is this?

MIAMI, Aug. 15, 2024 (GLOBE NEWSWIRE) — Defiance ETFs is proud to unveil MSTX, the first single-stock long leveraged ETF for MicroStrategy. MSTX seeks to provide 175% long daily targeted exposure to MicroStrategy. Defiance’s single-stock ETFs provide leveraged exposure to disruptive companies without the need for a margin account.

MicroStrategy, known for its visionary approach to data analytics and business intelligence, has emerged as a prominent player in the Bitcoin market. With a strategic focus on becoming one of the largest holders of Bitcoin, MicroStrategy has captured the attention of investors seeking leveraged exposure to Bitcoin. As of the end of Q1 2024, MicroStrategy held approximately 214,400 bitcoins with a market value of around $15.22 billion.

“As we introduce MSTX, our long leverage MicroStrategy ETF, we’re amplifying the potential for investors seeking long leveraged exposure to Bitcoin. Given MicroStrategy’s inherent higher beta compared to Bitcoin, MSTX offers a unique opportunity for investors to maximize their leverage exposure to the Bitcoin market within an ETF wrapper,” says Sylvia Jablonski, CEO of Defiance ETFs.

Yes, people who think plain old MicroStrategy — which crypto loon Michael Saylor has turned into a leveraged bitcoin vehicle — is a bit too boring and steady can now simply buy a leveraged ETF that solely invests in MicroStrategy.

So that’s leverage on leverage on an underlying asset that is already rife with leveraged trading. MicroStrategy’s one-year volatility is already 95.9, nearly eight times $SPY, State Street’s S&P 500 ETF. MSTX’s 1.75 times leverage would crank that up to eyewatering levels.

Single-stock ETFs are a painfully obvious regulatory workaround, designed mostly to offer easy leverage to people who somehow even Robinhood or WeBull won’t let trade options or get a margin account. Given the tons of YouTube videos that explain just how to game the approval system, this is a pretty . . . select group of elite traders.

It’s tempting to call this phenomenon financial masturbation, but self-pleasure is cost-free and has rarely harmed anyone. Leveraged single-name ETFs incinerate investor money, make markets more volatile and are solely created to generate fees for the sponsor. (MSTX costs 1.29 per cent a year, more than the 1.1 per cent charged by the average active US equity fund and not far off the management fee of the average hedge fund.)

It’s long been tempting to say that this or that “financial innovation” is the moment when the ETF industry has jumped the shark, but, realistically, the SEC’s lacking willingness and/or ability to curtail this nonsense means things will just get sillier.

But ultimately, something is probably going to go horribly wrong, the political winds will shift and finance types who have systematically clipped the wings of regulators will suffer collateral damage in the blowback.