Swaps For The People!

Netflix got hit hard on its earning report. Here's a look at a good sampling of the Netflix ETF ecosystem from early on Wednesday.

There are no surprises which speaks to things working they way they're supposed to which is good. The move is big enough though that depending on how and when the underlying snaps back, it could lead to the 2x lagging behind what an investor might hope it would do when holding for more than one day. To be clear, the boilerplate says one day but people do hope to capture 2x for longer periods.

NFLY has become a weekly pay with the current ex-date scheduled for 10/23. This week's payout will be relatively small at $0.10 but a big decline like today combined with a distribution like last week's $0.38 could end up being a point on the chart where a big divergence happened. Wednesday's drop is also a useful example for derivative income funds not necessarily being able to soften the blow. Fair enough if a 160 basis points smaller decline does soften the blow in your opinion.

These results shouldn't change anyone's opinion good or bad about any of these. The point is just to isolate an occurrence where the common stock gets kicked in the stomach and there being no surprises in the ecosystem.

On a related note, GraniteShares had a substack post in support of the YieldBOOST MSTR ETF (MTYY). Funds in the YieldBOOST suite sell put spreads on 2x levered ETFs. Similar to the above about Netflix;

Strategy (MSTR) as it is now known is of course a levered play on Bitcoin. GraniteShares reports that the State of Maryland pension owns Strategy as a Bitcoin proxy and it's not the only one as GraniteShares reports Florida, California and others do the same. 

The table of quotes shows that MSTR functions as a leveraged proxy, not just a proxy for Bitcoin. The 2X is right where it should be on the day, the YieldMax is down a little less similar to NFLY above and MTYY seems to be down a lot less. The last price of $18.17 was stale so when I looked, the bid was only ten cents lower so still having a relatively good day. 

The idea of using MSTR as a capital efficient way to access Bitcoin is intriguing of course but relying on the relationship to be static like 2.5-1 or something else seems like a risky bet. I'm not sure whether someone made an active decision about Strategy or the uptick in Maryland's exposure came from a decision about buying QQQ of which Strategy is a small component or some other ETF that holds the stock. 

I'll close out with VolatiltiyShares having filed for even more 5X levered funds.

The idea of 10% in a 5X S&P 500 fund, 2% in a 5X gold ETF that both track their respective underlyings for more than one day and then putting the rest in a result looks like this...

...would be very compelling. We are not there with leveraged ETFs and we may never be but I would not rule out the possibility of being able to create some sort of product akin to a swap that allows for creating a 5X effect for a period defined by the retail end user. Swaps for the people! Maybe this is something that can be tokenized or otherwise created on a blockchain. 

This would be a form of leveraging down or capital efficiency. We are not there now, repeated for emphasis, but understanding these concepts now makes sense in case they become more user friendly later.

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.