Strategy stock price has jumped by 27% this year, beating Bitcoin, which has jumped by almost 12%.
Meanwhile, a small leveraged ETF tied to the stock, Defiance Daily Target 2x Short MSTR ETF (SMST), has plummeted to a record low of $29, marking an 82% decline from its January levels. The ETF holds over $42 million in assets.
SMST vs MSTR vs Bitcoin | Source: SeekingAlpha
This sharp underperformance is due to SMST’s design: it seeks -2x the daily percentage change of Strategy stock (MSTR). In other words, it is structured to rise when Strategy stock falls—and to decline when the stock is in an uptrend.
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For example, on Monday, June 2, MSTR stock rose 1.30%, while SMST dropped 2.50%.
Other leveraged MSTR ETFs have also lagged behind its stock this year. The Defiance Daily Target 2x Long MSTR ETF has dropped by 4.5% while the T-Rex 2X Long MSTR Daily Target ETF has also dropped by 6.4% this year.
These funds have struggled largely because Strategy stock has declined more than 12% from its highest level this year, despite remaining up year-to-date.
Inverse leveraged ETFs like SMST are risky
Historically, leveraged inverse ETFs underperform their benchmark assets. For example, the ProShares UltraPro Short QQQ ETF or SQQQ has crashed by 97% in the last five years. In contrast, the ProShares UltraPro QQQ or TQQQ has jumped by 242% in the same period.
The SMST ETF will likely continue falling since analysts anticipate that Bitcoin (BTC) will do well in the long term. Ark Invest sees Bitcoin jumping to $2.4 million by 2030, while BlackRock expects that it will hit $700,000.
If these estimates are correct, it means that Strategy stock will jump in the long term because the company holds almost 600,000 Bitcoins, a number that is increasing weekly.
The other risk for SMST ETF is that it is highly expensive, with an expense ratio of 1.29%. In contrast, popular ETFs like the Vanguard S&P 500 and iShares S&P 500 charge just 0.03%. This means that a $10,000 invested in SMST will charge an annual fee of $129, while the S&P 500 funds charge just $3 a year.
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