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Strategy stock has surged by 27% this year, outperforming Bitcoin, which has gained nearly 12% in the same timeframe. Meanwhile, the Defiance Daily Target 2x Short MSTR ETF (SMST), a small leveraged exchange-traded fund (ETF) tied to Strategy stock, has experienced a significant decline. SMST has dropped to a record low of $29, representing an 82% decrease from its January levels, despite holding over $42 million in assets.

Understanding SMST’s Performance

The sharp underperformance of SMST can be attributed to its design. This ETF is structured to deliver -2x the daily percentage change of Strategy stock (MSTR). In simpler terms, SMST is designed to rise when MSTR stock falls and to drop when MSTR is on an uptrend.

For instance, on June 2, MSTR stock rose by 1.30%, while SMST dropped by 2.50%. This inverse relationship explains the ETF’s poor performance, especially during periods when Strategy stock is gaining value.

Other Leveraged MSTR ETFs Are Also Struggling

SMST is not the only ETF facing challenges this year. Other leveraged ETFs tied to MSTR stock have also underperformed:

  • The Defiance Daily Target 2x Long MSTR ETF has declined by 4.5% year-to-date.
  • The T-Rex 2X Long MSTR Daily Target ETF has dropped by 6.4% this year.

These funds have struggled despite MSTR stock remaining up year-to-date because the stock has retreated over 12% from its 2023 peak. This volatility has impacted leveraged ETFs, which are more sensitive to daily price fluctuations.

Risks of Inverse Leveraged ETFs

Inverse leveraged ETFs, like SMST, carry significant risks. Historically, these ETFs tend to underperform their benchmark assets over the long term. For example, the ProShares UltraPro Short QQQ ETF (SQQQ) has plummeted by 97% in the last five years. In contrast, the ProShares UltraPro QQQ (TQQQ), which leverages the Nasdaq 100 index, has surged by 242% during the same period.

Given these trends, SMST is likely to continue its downward trajectory, especially as analysts remain bullish on Bitcoin’s long-term potential. For instance:

  • Ark Invest predicts Bitcoin could reach $2.4 million by 2030.
  • BlackRock anticipates Bitcoin could hit $700,000 in the future.

If these projections materialize, Strategy stock (MSTR) is expected to benefit significantly, as the company currently holds nearly 600,000 Bitcoins—a number that continues to grow weekly.

High Costs Add to SMST’s Challenges

Another notable downside of the SMST ETF is its high expense ratio of 1.29%. This makes it an expensive investment option compared to traditional ETFs. To put this into perspective:

  • A $10,000 investment in SMST would incur an annual fee of $129.
  • In contrast, popular ETFs like the Vanguard S&P 500 or iShares S&P 500 charge a minimal fee of 0.03%, equating to just $3 annually for the same $10,000 investment.

These high fees make SMST less appealing to cost-conscious investors, especially when considering its underwhelming performance and inherent risks.

What Lies Ahead for SMST?

As Bitcoin and Strategy stock show strong long-term potential, inverse leveraged ETFs like SMST face an uncertain future. Investors should carefully evaluate the risks and costs associated with such ETFs before committing funds. For those interested in MSTR or Bitcoin, direct investments or traditional ETFs may offer more stable and cost-effective options.

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