Crypto News: ETF IQ: Most volatile of them all

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 two-fund race to create the US market's most volatile ETF rages on.

Defiance announced this week that it's bumped up the leverage level on its Defiance Daily Target 2X Long MSTR ETF (ticker MSTX) to 2x from 1.75x, matching that of rival T-Rex 2X Long MSTR Daily Target ETF (MSTU). Both funds seek to track the amplified performance of MicroStrategy Inc., which is already a juiced-up bet on Bitcoin. With the latest leverage increase, both MSTX and MSTU effectively offer 4x exposure to the cryptocurrency, according to Bloomberg Intelligence's Eric Balchunas.

It might seem like the two are scrapping over small differences in leverage, but there are hundreds of millions of dollars at stake. While the first-mover advantage has historically been make-or-break in the $10 trillion ETF industry, leverage levels are playing an increasingly important role in crowning winners as retail investors opt for the funds with the highest risk-reward ratios.

Case-in-point: MSTX, which launched in mid-August has amassed roughly $587 million so far (an impressive feat for such a young ETF). But MSTU, which began trading a month later with 2x leverage from the start, already commands more than $800 million.

Michael Saylor, chairman and chief executive officer at MicroStrategy. Photographer: Valerie Plesch/Bloomberg

Of course, both US-listed funds are still miles behind Europe's market in terms of leverage, where the GraniteShares 3x Long MicroStrategy Daily ETP (LMI3) has existed since 2022. But the above dynamic doesn't seem to translate overseas: LMI3 has only collected about $43 million.

In any case, it's an open question whether or not the flood of cash into these high-octane MicroStrategy ETFs are impacting the underlying stock at all. Michael Green of Simplify has ventured that yes, MSTU in particular has powered MicroStrategy itself to a record premium relative to the price of Bitcoin.

State Street Global Advisors is taking a page from Vanguard Group's blueprint for multi-share classes to further its quest to break ground in the final frontier for the ETF industry: the American retirement system.

The firm on Friday filed for permission to create mutual funds as a share class of its ETFs, which would be "specifically designed for, and only available to, investors purchasing through a retirement plan." That's the opposite direction of the majority of the applications we've seen since Vanguard's patent on the structure expired in May 2023, which have sought to issue ETF share classes of existing mutual funds.

Should the US Securities and Exchange Commission sign off on the proposal, it would create an avenue for State Street and others to transform their ETF strategies into a vehicle suitable for retirement accounts, which are typically reserved for mutual funds and collective investment trusts. SSGA executive vice president and chief business officer Anna Paglia has led the firm's efforts to crack into the 401(k) system.

"401(k) plans don't buy ETFs for all the reasons that are very known to us — technology, regulation — but we believe that these things are going to converge at some point," Paglia said in an interview in May. "ETFs, just like mutual funds, are used in other parts of the retirement industry — for example, IRAs — and we are really working to build that ecosystem where ETFs can find their way into 401(k) plans as well."

While advocates argue that the ETF wrapper has lower costs and is more tax-efficient than other vehicles, there is pushback as capital gains taxes don't apply to 401(k)s. However, State Street in its application said shareholders in both types of funds would benefit should the SEC approve.

"By having a Mutual Fund Class, the Fund may benefit from having access to Retirement Plan distribution channels and ultimately ETF Class shareholders may benefit from greater economies of scale," the filing said.

As money managers push to bring private credit to public markets, investors in a new breed of ETFs will want to know how they can get out when markets are stressed. Their early plans aren't resolving doubts.

BlackRock Inc.'s Bitcoin fund posted a record inflow as speculation over how the US election may play out stirs demand for the largest digital asset.

Two ETFs tracking shares in Hong Kong and China debuted in Saudi Arabia this week, as investments and financial links between the Asian city and the oil-rich kingdom grow.

In this week's Drill Down on Bloomberg Television's ETF IQ, Julie Cane of Democracy Investments stopped by to talk about the Democracy International Fund (DMCY).

DMCY's portfolio of mid- and large-cap international stocks is weighted according to the Economist Magazine's Democracy Index, which gives a larger share to countries that holds democratic elections while under-weighting those with authoritarian regimes. As such, the fund's top geographic holdings are Japan, the UK and Canada, while countries such as China and Saudia Arabia have no presence.

DMCY has gathered about $8 million since it launched in 2021 and charges 50 basis points. It's risen roughly 13% on a total return basis over that span, versus 31% for the iShares MSCI ACWI ETF, which tracks equities from both developed and emerging markets.

Bloomberg Television's ETF IQ is on hiatus next week for special coverage of the US presidential election. Eric Balchunas, Scarlet Fu and I will be back on November 11 at 12pm Eastern.