The T-Rex 2X Long MSTR Daily Target ETF (MSTU), a new leveraged ETF that aims to provide 200% of the daily performance of MicroStrategy (MSTR) stock, soared 8.7% on Wednesday, October 24th. This surge tracked gains in MicroStrategy's stock price and the price of Bitcoin, as MSTR has shifted its focus to accumulating the cryptocurrency, making its stock a proxy for Bitcoin.
MSTU works by entering into swap agreements with financial institutions, investing at least 80% of its assets in these swaps to gain 200% daily exposure to MicroStrategy. However, this structure introduces several risks that investors should be aware of.
Firstly, there is rebalancing risk, as the ETF's exposure to MSTR may not accurately track the 2x objective due to daily rebalancing. Additionally, MSTU faces sector risk due to MSTR's Bitcoin exposure, as any news or regulation surrounding the crypto industry can create volatility. Furthermore, volatility and compounding risk can cause MSTU's performance to deviate significantly from 2x MSTR's performance over time. Lastly, counterparty risk related to the swap agreements could also impact MSTU's holdings.
While MSTU offers the potential for amplified returns, its leveraged nature and the risks involved make it a high-risk investment. Some experts suggest that it might be better to invest directly in MSTR rather than MSTU, as the latter's structure introduces additional complexities and risks. As with any leveraged ETF, investors should fully understand the risks before considering MSTU for their portfolios.
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