Crypto News: ETF IQ: One-Day-Only Funds

Welcome to ETF IQ, a weekly newsletter dedicated to the $12 trillion global ETF industry. I'm Bloomberg News reporter and anchor Katie Greifeld.

The US exchange-traded fund market welcomed its most volatile offering yet this week — the Defiance Daily Target 1.75X Long MSTR ETF (ticker MSTX) — igniting a flurry of hot takes.

At the heart of the matter is that MicroStrategy, which is nominally a software company but is best known for buying massive amounts of Bitcoin, already behaves like a leveraged ETF. The stock's 90-day volatility is a stunning 97%. Bloomberg Intelligence estimates that means there's a two-thirds chance MSTX could go up or down 168% in the next 12 months.

On one end of the spectrum was Robin Wigglesworth of the Financial Times, who penned a particularly scandalous piece on the ETF industry's "shark-jumping moment." On the other end was Bloomberg Intelligence's Eric Balchunas, who wrote that there's a market for investors looking to allocate a small portion of their portfolios to "packaged adrenaline" products such as MSTX.

There's plenty to debate about when it comes to these high-octane ETFs, and most of the discussion tends to center around whether or not the average investor should be able to access that much leverage just by clicking a button on their brokerage account. But there's one truth that everyone seems to agree on: no one should hold these funds for very long.

Take the Europe-listed GraniteShares 3x Long MicroStrategy Daily ETP (ticker LMI3). While MicroStrategy itself is higher by more than 100% this year, LMI3 has dropped nearly 84% — despite offering leveraged long exposure to the stock. That dynamic holds on a one-, three- and six-month basis as well.

That's actually the ETP working as intended. LMI3's description says it's designed to provide three times the daily performance of MicroStrategy (with a particular emphasis on the "daily"). In practice, the only realistic holding period for a product with this kind of leverage seems to be one day, or a couple days at most. With that in mind, hopefully the investors piling into such ETFs are selling them just as quickly.

This newsletter has discussed before the idea that buffer ETFs are being employed as bond replacements. The funds use options to limit downside stock risk while capping upside, a proposition that resembles a fixed-income security that pays interest and can be redeemed at maturity for face value.

But for anyone who bought these ETFs to replace their bond allocation, the cross-asset volatility of the past couple weeks has been an interesting test of that logic. A key point is that the ETFs limit but don't completely eradicate the potential for losses, and when the S&P 500 skidded, they took lumps as well. Contrast that with the experience of Treasuries holders who benefited from that market's surge.

That doesn't mean they aren't useful bond replacements, according to Allianz Investment Management's head ETF market strategist Johan Grahn.

"Yes, they are correlated to equities and we want them to be, because keep in mind, if you're investing over time — decades, even — seven out of 10 times, the equity market is going up. So you're tilting the odds in your favor," Grahn said in a phone interview. "It's a different way of thinking about what you're looking for."

Besides, there's no guarantee that bonds will save you anyway, Grahn said — and it's true, Treasuries have been a very unreliable hedge over the past few years. Those haven properties were nowhere to be found in 2022, when the Bloomberg US Treasury Total Return Index dropped 12.5% as the S&P 500 spiraled 19% lower.

And how did the AllianzIM US Large Cap Buffer20 Jan ETF fare amid 2022's mayhem? Just 0.6% lower on the year.

JPMorgan Asset Management is elevating Travis Spence — a 20-year veteran of the firm — to global head of its $190 billion ETF business.

Rockefeller Asset Management is the latest money manager to capitalize on the muni ETF boom.

Investors spooked by the yen carry-trade blowup have pulled cash from a Japan-focused stock ETF that strips out moves in the country's currency.

In this week's Drill Down on Bloomberg Television's ETF IQ, Bill Miller IV from Miller Value Partners stopped by to talk about the Miller Value Partners Appreciation ETF (MVPA). It's a highly concentrated, highly active portfolio — the fund holds a portfolio of up to 40 stocks that has just 5% overlap with the S&P 500.

In addition to valuations, one of the factors Miller and team consider is what degree of insider buying a stock has:

We care immensely about whether or not management of the companies we buy own stock in their own firms that they run, and whether or not they're acting in an aligned way. If a manager's loading up on a stock, we're going to be much more interested.

So far, it's working. MVPA has climbed nearly 26% since its late January launch versus a roughly 16% return for the S&P 500.

Bloomberg Television's ETF IQ is on hiatus next week for special coverage of the Democratic National Convention. Eric Balchunas, Scarlet Fu and I will be back on August 26 at 12pm Eastern.

Stay updated by saving our new email address

Our email address is changing, which means you'll be receiving this newsletter from noreply@news.bloomberg.com. Here's how to update your contacts to ensure you continue receiving it:

Gmail: Open an email from Bloomberg, click the three dots in the top right corner, select "Mark as important."
Outlook: Right-click on Bloomberg's email address and select "Add to Outlook Contacts."
Apple Mail: Open the email, click on Bloomberg's email address, and select "Add to Contacts" or "Add to VIPs."
Yahoo Mail: Open an email from Bloomberg, hover over the email address, click "Add to Contacts."