Two leveraged exchange-traded funds (ETFs) have been identified as the worst performers of the year, according to Morningstar. The Defiance Daily Target 2X Long MSTR ETF MSTX has been named the worst, with Bryan Armour, Morningstar’s director of passive strategies research, describing it as a “Russian nesting doll” of issues.
What Happened: The ETF, valued at $2.2 billion, focuses on MicroStrategy MSTR, a company with significant investments in Bitcoin BTC/USD. The ETF amplifies risks by doubling down on a stock that already acts as a leveraged bitcoin proxy. Structural issues such as imprecise swaps and volatility drag further exacerbate its problems, the Financial Times reported on Friday.
The YieldMax Short NVDA Option Income Strategy ETF DIPS, valued at $13 million, also made the list due to its high-yield appeal paired with substantial downside risk through complex derivatives. Armour emphasized that both ETFs demonstrate how high fees and excessive risk can erode long-term returns.
As per Benzinga Pro, MSTX’s yearly returns have climbed by 237.33% as of Friday’s pre-market hours. Meanwhile, DIPS dropped by 38.76% in terms of YTD returns.
On the other hand, two ETFs were commended for their effective strategies: Jensen’s $70 million Quality Growth ETF JGRW and Neuberger Berman’s $216 million Small-Mid Cap ETF NBSM. These products offer proven, active strategies with lower volatility and competitive returns.
Benzinga Pro data revealed that JGRW increased by 3.96% in terms of YTD returns while NBSM climbed by 0.90%.
Why It Matters: The Defiance Daily Target 2X Long MSTR ETF and its counterpart, the T-Rex 2X Long MSTR Daily Target ETF MSTU, collectively manage around $5 billion in assets. These funds are designed to amplify MicroStrategy’s daily stock returns by 2x, reflecting investor enthusiasm amid Bitcoin’s recent rally. However, experts have warned that these ETFs expose investors to significant risks and underperformance.
Furthermore, these ETFs have shown significant tracking errors due to their exposure to volatile swaps and options. This highlights potential risks for investors, as sharp deviations have been observed in the ETFs tracking MicroStrategy, underscoring the challenges of maintaining alignment with the underlying asset.
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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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