Defiance ETFs filed for an ETF based on Microstrategy that will sell short a 2x levered long ETF and a 2x levered inverse ETF in roughly equal proportions, so it will sell short MSTX (or the other one) and SMST so it is not a directional bet on which way the common will go, it is a bet that the erosion of both funds will yield a profitable result when sold short. It is trying to capture what is referred to as volatility drag.
Rob Arnott said on Bloomberg a few weeks ago that he does this trade in some sort of personal, fun account. Here's a blog post from Elm Wealth that dives deeper into the idea. Elm mentioned that David Einhorn has done a different version of that trade, hedging it with a long position in the underlying common.
So can this strategy come out with some sort of short volatility or relative value result that someone might want? I backtested the Defiance idea and the Einhorn adaptation for both Microstrategy and Nvidia.
Elm worked through an example where the Defiance idea should go to zero and that is what happened with Portfolio 2 which is 50% short the two 2x funds with out hedging with the common stock. Testfol.io did something weird when I removed the MSTR portfolios, it showed the unhedged Nvidia version also going to zero. Fun idea but maybe with someone else's money.
Here's a different one that I probably was skeptical of but it does what it's supposed to. It took a little doing to understand it but...the fund is the Simplify Short Term Treasury Futures Strategy ETF (TUA). It leverages up two year treasuries 5x. If an investor wanted to put 20% into the US Treasury 2 Year Note ETF (UTWO) or just an actual two year note, they should be able to get the same effect putting 4% into TUA leaving the cash to do something else with like maybe some sort of portable alpha strategy.
Portfolios 1 and 2 should be identical and they are. Portfolios 3 and 4 are sort of in line with how we've tried to leverage down into a more robust portfolio. Because TUA started in late 2022, we can't backtest in a more difficult stress period.
If someone is really interested in a portable alpha strategy, getting the leverage from a fund that just leverages up one asset class, like 2 year treasuries or the S&P 500 is much simpler than blending stocks or bonds and an alternative strategy. There's less that can go wrong.
This probably can work but I'm not sure why anyone would need to do this. If we take TUA out of portfolios 3 and 4 and replace that 6% with BIL, the unlevered T-Bil ETF, the CAGR improved by almost 30 basis points in each portfolio.
Let's close out checking in on the REX Bitcoin Corporate Treasury Convertible Bond ETF (BMAX). I think I mentioned it when they filed but is has been trading since mid-March.
As the name tells you and the chart shows you, it is a proxy to a large degree for Bitcoin. It owns convertible bonds of companies that do the Microstrategy strategy (that's one too many baby's baby~Austin Powers) of issuing convertibles to buy Bitcoin. It seems like more companies will be doing this so there will probably be issues from more companies than the three companies I see in there now (MARA and RIOT in addition to MSTR). It is possible BMAX could pay out some sort of yield, I recall one of the Microstrategy issues having a small coupon but most of them have no yield.
I threw CWB onto the chart which I believe is the oldest convertible bond ETF. Convertibles often have equity beta. That has been the case for any fund I've ever looked at but individual issues from other companies, not the Bitcoin converts, could have less equity beta if they are very far from their conversion price. Individual issues though are probably very difficult to get into for retail sized accounts.
BMAX looks like a great source of tremendous volatility, as we've talked about before, Microstrategy functions as a leveraged Bitcoin proxy and so far BMAX has been more muted than Microstrategy common stock but more volatile than Bitcoin.
These things bring out a lot of naysayers but I think they are very useful as teaching tools in terms of how to construct portfolio or more specifically how to make incremental improvements over time.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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