ETF Inflows & Outflows
Performance Leaders & Laggards
Source: ETF Action; flows and performance data as of 12/26/24; performance data excludes leveraged and inverse products
Weekly ETF Reads
The ETF Flowdown: Wrapping Up 2024 by Kirsten Chang
“2024 stands as a testament to the adaptability and innovation across the ETF universe.”
How to Find the Right Active ETF for Your Portfolio by Bryan Armour
“Markets where active ETFs make the most sense often conflict with where active managers can add the most value.”
Questions raised over business model of Goldman’s ETF Accelerator by Steve Johnson
“Goldman has always had its foot half-in on ETFs. We haven’t seen the same commitment to ETFs as we have seen from other big banks.”
Private-Credit ETFs Promise Access to Rarefied Markets. The Pros and Cons. by Debbie Carlson
“That has raised concerns about both self-dealing and potential liquidity mismatches during market stress.”
Why Endowments Like UConn Are Switching from Hedge Funds to ETFs by James Comtois
“For smaller institutional investment teams with limited experience, ETFs offer a professionally easier way and easier alternative to mitigate portfolio volatility.”
2 ETFs Offer a New Twist on Popular Buffer Strategies by Jeff Benjamin
“We compare it to a thermostat that keeps the temperature inside your house at 70 degrees all the time. We don’t care what the temperature is outside as long as it’s 70 degrees inside.”
Hey, I’m Doing A Thing by Tom Lydon
“I can’t get enough of ETFs.”
The Year in Crypto: Bitcoin and Ethereum ETFs Bring More Investors Into Crypto by André Beganski
“There has never been a launch like this, and there will never be another one.”
Crypto ETFs in 2025: What’s to come for Solana, Hedera and more? by Jason Shubnell
“There’s a new sheriff in town and it’s a crypto-friendly sheriff.”
ETF Post of the Week
I decided to rename this section “ETF Post of the Week”, which means I can take some liberties with what qualifies as a “post”. Previously, it meant “tweet”. This week, it means “SEC filings”. Strive, Bitwise, and Rex Shares all posted filings for ETFs that invest in the stock or convertible bonds issued by companies such as MicroStrategy that hold bitcoin in their corporate treasury. Investor appetite for the securities of these types of companies appears strong (more on that below in “ETF Charts of the Week”). Expect a slew of these ETFs in 2025 as the bitcoin treasury virus spreads.
ETF Charts of the Week
A developing story over the past month has been the substantial investor demand for 2x leveraged MicroStrategy ETFs from Defiance and Rex Shares. These ETFs launched in August/September and have already taken in $2.5 billion in new money. Both products initially gained exposure via total return swaps, which are provided by prime brokers (financial institutions that work with larger investment clients). If prime brokers no longer wish to offer this exposure for whatever reason (too much risk to carry on their balance sheet, etc), these ETFs must look to alternatives. That is exactly what has happened and both ETFs are now looking to the options market to manage exposure, an approach that isn’t nearly as precise as total return swaps. The charts below show the recently elevated tracking error from both ETFs, along with an enormous spike in MicroStrategy call option volume (which these ETFs are obviously contributing to). Roundhill CEO Dave Mazza explains to FT:
“Simply put, MicroStrategy is too small a company to accommodate the AUM and trading volume in these products. At this point, these ETFs have already reached the ‘breaking point’. If a leveraged fund is unable to achieve 2x exposure via swaps, it’s an indication that the trading community views it as a poor risk-reward decision to write additional swap exposure for the fund. Long options are a much less precise tool for achieving exposure, but they are also a tool that doesn’t require a counterparty to take on credit risk to the funds. While this could theoretically happen for any leveraged or inverse ETF, to our knowledge it has not because most are index based or focused on larger securities.”
With new ETFs that would hold MicroStrategy’s convertible bonds or equity likely on the way (see above), this saga could grow even more interesting in the new year.
(Note: Catch my recent Crypto Prime conversation with Defiance ETFs’ CEO Sylvia Jablonski, where we discuss all of this and much more).
Source: FT’s Steve Johnson
Source: Wall Street Journal
