Leveraged MSTR ETF Plunges 81%: A Cautionary Tale

An exchange-traded fund (ETF) designed to offer leveraged long exposure to shares of MicroStrategy, a business intelligence firm turned cryptocurrency hedge fund, has seen a significant decline since November. The T-REX 2X Long MSTR Daily Target ETF (MSTU) has dropped approximately 81% from its peak on Nov. 20, according to The Kobeissi Letter.

The ETF lost some 40% of its value in the past three trading sessions alone, while shares of MSTR, MicroStrategy's stock, dropped roughly 20% over the same period. This decline highlights the risks associated with leveraged ETFs, which tend to underperform due to the costs of daily rebalances to maintain a leverage target and typically hold financial derivatives rather than the underlying stock.

Leveraged ETFs can experience massive downswings, as noted by The Kobeissi Letter. In volatile market conditions, these ETFs may lag comparable strategies by more than 20%, according to a study by GSR Markets.

In September, asset managers REX Shares and Tuttle Capital Managed jointly launched two ETFs designed to provide leveraged exposure to MSTR share performance. The ETFs, MSTU and T-REX 2X Inverse MSTR Daily Target ETF (MSTZ), aim for two-times leveraged long and short exposure to MSTR, respectively.

Originally a business intelligence firm, MicroStrategy transformed into a de-facto cryptocurrency hedge fund in 2020 when founder Michael Saylor started using the company's balance sheet to buy Bitcoin (BTC). The company has spent upward of $33 billion buying BTC at an average cost of around $66,000 per coin, earning an unrealized profit of more than $10 billion, according to data from MSTR Tracker.

At the peak of MSTR's performance in November, the stock had clocked 2500% returns. As of Feb. 26, MSTR shares are down around 15% in the year-to-date, largely due to Bitcoin's February price correction.