The T-REX 2X Long MSTR Daily Target ETF (MSTU) is a leveraged exchange-traded fund designed to provide investors with 2x the daily performance of Strategy Inc. (MSTR) shares. MSTR shares are generally viewed by the market as a leveraged Bitcoin investment, potentially adding exceptional risk when considering MSTU as a trading strategy. With a daily reset compounding performance when held longer than a single day, MSTU should only be used by sophisticated traders seeking to amplify their exposure to MSTR and, in turn, Bitcoin.

About T-REX 2X Long MSTR Daily Target ETF

MSTU was launched by Rex Shares on October 19, 2023, on the Cboe BZX Exchange as part of its leveraged single-stock ETF series. The strategy has a total expense ratio of 105 bps, a relatively modest fee when compared to peer leveraged MSTR ETFs on the market.

The fund exhibits substantial liquidity with $557 million in net assets, with an average of $205 million in share value changing hands on a daily basis. Liquidity should facilitate an active market for traders to enter and exit positions, though the fund has an average bid/ask spread of 0.22%, potentially adding costs to one's performance.

MSTU was designed to provide traders with 200% daily exposure to MSTR shares, meaning that if MSTR shares appreciated by 1% in a single trading day, MSTU may appreciate by 2%. MSTU utilizes total return swap (TRS) derivatives in order to gain leveraged exposure to MSTR shares. TRSes have some intricacies that may influence the performance of the fund, particularly when held for longer than a single trading day.

TRSes are derivative contracts that provide the receiver exposure to the total returns of the underlying asset in exchange for a fixed rate. TRSes are settled on a daily basis, with performance resetting on the following trading day. This is reflected in the performance of MSTU, in which the ETF will reflect the daily performance with performance resetting on the following trading day. As a result of this feature, holding MSTU for longer than a single trading day can result in a compounding effect that may amplify gains or losses, particularly if the underlying stock moves in the same direction over multiple consecutive days.

The downside risk is that performance isn't 1-for-1 in terms of rolling returns vs. compounded returns. For example, if an investor were to place $100 into MSTU shares and MSTR shares were to appreciate by 1%, the investor would gain 2% and close the day with $102. If shares were to decline by -1% on the following trading day, the investor's position would decline to $99.96 rather than $100. Over time, this can be value-destructive if the investor remains positioned in MSTU shares, possibly resulting in significant loss in value.

If shares were to undergo multiple consecutive days of declines, the value lost may be unrecoverable given that the compounding performance is more heavily weighted to the downside risk.

It's also important to note that Strategy also uses financial leverage (debt) with regard to Bitcoin. This can be found on its balance sheet. It also issues preferred shares, which act as soft leverage. This leverage is different from the leverage used by MTSU, which serves to amplify the effects of Strategy's price movement.

Investor Suitability

MSTU shares should only be used by seasoned traders seeking to amplify their daily exposure to MSTR shares. MSTU should not be considered a long-term investment strategy given the significant risks associated with the structure of the fund and the amplified exposure to bitcoin. Given that MSTR shares are valued as a leveraged bitcoin strategy, MSTU shares can be inadvertently valued as a leveraged ETF of a leveraged bitcoin strategy. Compared to market peers, MSTU exhibits the most trading depth, making it a more optimal trading tool for this type of product.

MSTU employs 200% exposure to MSTR shares, exposing investors to substantial risks that should be considered prior to making a final investment decision. Trading MSTU shares can provide investors with significant exposure to the price of bitcoin, adding substantial risk to an investor's position if the market were to take a risk-off tone. Holding MSTU for longer than a single trading day can result in compounded performance that may adversely impact one's investment. Leveraged strategies expose investors to NAV decay over time given the structure of the funds, adding weight to the downside when considering all other risks.

Short-term trading may add substantial capital gains taxes on top of management fees, spread risk, and brokerage fees that should be considered when evaluating total expected returns of a trade.

You can review additional risks here and the SEC bulletin here.

Given the risky nature of this fund, traders should adhere to strict risk management protocol and sell discipline, as a bad trade can worsen in a short period of time due to the compounding effect of the fund.

Final Thoughts

MSTU is a 2x leveraged trading strategy designed to provide 200% of the daily exposure to MSTR shares. Given that MSTR is viewed as a leveraged bitcoin strategy, trading MSTU can be considered an amplified tool for trading bitcoin. Given the risky nature of this ETF, traders should take significant precautions before trading this fund and set risk parameters to protect their initial investments from significant losses.

This article answers three questions about MSTU:

1. What is MSTU's relationship to Strategy, Inc. and Bitcoin?
2. What risks accompany using MSTU?
3. What should investors consider when assessing MSTU's fit for their portfolio?

Editor's note: This article is intended to provide a general overview of the ETF for educational purposes only and, unlike other articles on Seeking Alpha, does not offer an investment opinion about the ETF.