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The craze around MicroStrategy (a company that practically turned itself into a Bitcoin holding machine) has thrown a spotlight on weaknesses in the $15 trillion exchange-traded fund (ETF) market.
The ETF sector has hit a snag with two leveraged funds tied to MicroStrategy’s volatile stock. These funds, built to deliver double the daily returns of MicroStrategy shares, are instead giving investors unexpected results.
The T-Rex 2x Long MSTR Daily Target ETF (MSTU) and Defiance’s Daily Target 2x Long MSTR ETF (MSTX) have seen their performances deviate wildly from expectations in recent weeks. On November 21, MSTU dropped 25.3%, according to FactSet <a href="https://www.factset.com/" rel="noopener noreferrer nofollow" target="_blank">data</a>.
That’s bad, but it should have been worse—MicroStrategy’s stock fell 16%, meaning the fund should have dropped by 32%. A rare win for investors. But four days later, the tables turned. MSTU lost 11.3%, while MicroStrategy shares dipped just 4.4%.
That’s nearly three percentage points worse than the fund’s promised performance. MSTX didn’t fare any better, losing 13.4% that same day—far off target.
<h3 id="span-style-font-weight-400-the-problem-with-size-and-swaps-span">The problem with size and swaps</h3>
Before November, these ETFs were doing exactly what they were designed to do. But by mid-November, cracks started to appear. The funds have become too big, plain and simple.
Enthusiasm for MicroStrategy—and by extension, Bitcoin—skyrocketed after Trump’s presidential victory, turning these ETFs into massive players almost overnight.
Both funds are supposed to track MicroStrategy’s stock performance using tools like swaps. Swaps are straightforward. A broker pays the daily return of an asset to the fund, minus a fee, ensuring precision.
But here’s the catch: MSTU is managing $2-$3 billion in daily assets, and MSTX isn’t far behind. Prime brokers can’t keep up, and the supply of swaps is drying up.
With swaps maxed out, the funds turned to call options. Call options give the right to buy an asset at a specific price within a certain time. They’re a decent backup, but they don’t deliver the same accuracy as swaps.
Defiance ETFs CEO Sylvia Jablonski <a href="https://www.ft.com/content/f4821570-f6d3-468c-8553-570ccfead14a" rel="noopener noreferrer nofollow" target="_blank">defended</a> the move to options, calling it efficient for achieving leverage. But critics like Dave Mazza of Roundhill Investments, argue otherwise. Options are unpredictable, especially for a stock as volatile as MicroStrategy.
Mazza pointed out that these ETFs now hold exposure worth over 10% of MicroStrategy’s market cap. That’s unheard of in the ETF world. “MicroStrategy is too small to handle this level of trading volume and assets under management,” he said.
<h3 id="span-style-font-weight-400-leveraged-chaos-meets-bitcoin-hype-span">Leveraged chaos meets Bitcoin hype</h3>
<a href="https://www.cryptopolitan.com/microstrategy-bitcoin-us-stock-yearly-gain/" rel="noopener noreferrer nofollow">MicroStrategy</a> has gone from a software company to a full-blown Bitcoin proxy. The company holds $43 billion worth of Bitcoin, bought with mountains of debt. This year alone, its stock has surged 430%.
Investors looking to amplify their exposure to Bitcoin have swarmed MSTU and MSTX, pushing these funds to their limits. When these ETFs grew too big, they hit a wall. The supply of swaps dried up, and fund managers had no choice but to rely on options.
This kept the funds alive, but it introduced massive tracking errors. Kenneth Lamont of Morningstar compared the situation to past ETF disasters, like the 3x Tesla ETP by Leverage Shares. That fund couldn’t borrow enough shares to meet demand, leading to performance issues.
Similarly, BlackRock had to overhaul its iShares Global Clean Energy ETF in 2020 after a surge in assets forced a complete portfolio redesign. Lamont called the MicroStrategy ETF situation “a stuttering engine.” Rapid growth, he said, often reveals hidden flaws.
The Securities and Exchange Commission (SEC) discourages ETFs from closing to new investors, even when they run out of swaps. But Kashner suggested that stopping new unit creations could solve the problem.
This would effectively turn the ETFs into closed-end funds, where prices and net asset values don’t always align. “Fund companies must choose between growth and accuracy, and they’ve clearly prioritized growth,” she said.
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How MicroStrategy hype exposes overlooked flaws in US ETFs

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