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.
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.
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.
