“Occasionally, Wall Street gets things right. But most of the time, greed wins out, and some genuinely atrocious products are turned out. Most of them, like double or triple-leveraged funds, cost investors dearly. Sometimes, during moments of absolute gluttony, Wall Street creates things like mortgage-backed securities, which cost the country dearly. The difference is only the level of greed and stupidity.”
- Albert Hastings II
Over the years, I’ve written about a range of gimmicks that Wall Street has successfully (most of the time) pawned off to entice individual investors. These have ranged from funds that track highly focused political angles (such as a MAGA fund) to the reverse-IPO model of special purpose acquisition companies (SPAC). Almost always, these products serve the best interests of Wall Street rather than individual investors. This is usually achieved through excessive management fees combined with underperformance.
Bloomberg and Morningstar recently discussed a new Wall Street bonanza designed to capitalize on MicroStrategy’s investment in Bitcoin. As with many Wall Street offerings, the product capitalized on the hottest new trend with an overlay of unmitigated greed—for industry players rather than individual investors.
Microstrategy, Bitcoin, and the Horror of 3X Single Stock ETFs
In mid-2020, MicroStrategy (NASDAQ: MSTR), a Virginia-based software analytics and services company, announced it would use Bitcoin as a component of its treasury reserve policy and as part of management’s stock price strategy. By the end of the year, MSTR had amassed roughly 105,000 bitcoins, spending approximately $2.5B. The acquisition was financed by issuing over $2B in corporate debt. By utilizing this strategy, MicroStrategy made itself more of a bet on the price of Bitcoin than on the business strategy and dynamics of its underlying business.
The decision to utilize Bitcoin as a valuation tool immediately drove a series of non-investment players to the company’s stock. People who loved Bitcoin saw Bitcoin as a growth tool or wanted to be in on the newest hipster player on Wall Street, and they were all looking for new ways to invest in MicroStrategy stock.
One of the most aggressive (or egregious as the case may be) players who saw a way to turbocharge an investor’s gains (or losses) was GraniteShares. The company is a UK-based issuer of exchange-traded funds (ETFs) focusing on leveraged single-stock ETFs. The idea is quite simple – if you like a company’s return, you’ll love an ETF that triples it (or its loss). One might think (and you’d be right) that it would be cheaper and safer to buy three times as many shares of your holding if you’d like to capture more potential gains. Let me explain why this is the case with our good friend MicroStrategy stock.
For those investors who can’t get enough of MicroStrategy’s play on bitcoin, GraniteShares 3x Long MicroStrategy Daily ETP (LMI3) is just the ticket. With only $11M in assets under management, this is about as small and focused as an individual can find. The idea behind the ETP is simple. LMI3 is an exchange-traded product that offers investors three times the daily return of MicroStrategy’s stock. If MicroStrategy goes up 3% on Monday, LMI3 goes up 9%. If MicroStrategy goes down 5% on Tuesday, LMI decreases 15%.
It all seems pretty straightforward until the idea hits a terrible wall, similar to Jack Bogle’s “tyranny of compounding costs.” For those who purchased the product thinking they would triple their gains when the stock went up, consider these returns: In 2024, MicroStrategy stock rose by 100%. In that same period, LMI3 dropped by roughly 82%. This return dynamic remains valid for one, three, and six months.[1]
Something’s Fishy in ETF-Land
For any investor who purchased LMI3 last year to triple investment in MicroStrategy’s stock price and opened their brokerage account statement 6 months later, they were sadly abused by their strategy. For all those investors who filed complaints about their returns, it was in the disclosure provided by GraniteShares. Investors are told not to hold the instruments for the long term. They are frequently called “Same-Day” or “One-Day-Only” ETFs. The ability to triple your returns (or losses) is limited to….wait for it….only the first day.
You own the ETF. (That description is generally accurate. There are ways to achieve these results over an extended period, but you need an advanced degree in mathematics to get there.) Greifield writes in her article:
“LMI3 does a good job of giving you three times the daily return of MicroStrategy but a horrific job of giving you three times the year-to-date return of MicroStrategy. (It gives approximately negative 0.8 times the year-to-date return.) The funds offer amped-up exposure only to a stock’s one-day return given that the daily rebalancing of the options book erodes returns over time.”
There’s a lot to unbundle here. That should tell most individual investors they are way over their heads, but that’s never been a significant deterrent on Wall Street. Here’s why the numbers seem so out of whack.
First, the ETF is designed to give an investor triple the return of the daily return of the stock on the day you buy it. The leverage is recalculated daily, so the fund starts fresh each morning with the current market price. This can lead to significant deviations from the underlying index over longer periods if the market experiences considerable volatility. This leads us to the second point. Volatility is fatal in the design of these ETFs. If the stock increased by 1% every day with no deviation, the ETF would act in the manner most investors assume they purchased it for. Unfortunately, volatility is disastrous for ETFs like LMI3. Because most of the stocks underlying triple-leveraged ETFs are highly volatile, holding a 3x leveraged single-stock ETF for more than a week can lead to shocking results.
A Bugaboo Example
Let’s use a generic example to show why these two caveats are so vital to the returns of ETFs like LMI3. At the beginning of the trading week, an investor decides to invest in 3X Long Bugaboo Blast Daily ETF. Shares of the ETF trade for $100 per share. Shares for Bugaboo trade at the same price - $100 per share. (I know. I know. The odds of that happening are nil, but they make the example easier to work through.) The ETF is designed to expose you to the returns of three shares of Bugaboo.
On Monday, Bugaboo’s share price increased by 10%, which means that the ETF's share price will increase by 30%. The stock is now worth $110/share, and the ETF is worth $130/share. So far, so good. On Tuesday, the investor adds an additional share to your portfolio. At this point, the ETF must expose the investor to three times $130 worth of stock or 3.55 shares. On Wednesday, the stock price jumped another 10% (this investor knows how to pick stocks!). That means at the end of the trading day on Wednesday, the stock price sits at $121/share, and the ETF is at $169/share. ETF needed to purchase more shares on Monday and Tuesday nights to meet these requirements.
Here’s a much simpler way to look at how the ETF operates: “Every time the stock goes up X% and then down Y%, the ETF goes up 3X%, and then down 3Y% of a bigger number, so the loss is greater. And every time the stock goes down Y% and then up X%, the ETF goes down 3Y% and then up 3X% of a smaller number, so the gain is smaller. The ETF is forced to buy shares every time they go up and sell shares every time they go down, which has to be a drag on returns.”[2]
Katie Greifield points out that these intuitions only work if the stock steadily goes up or down. Suppose the stock prices see wide price swings, like up 16% on Monday, down 19% on Tuesday, up 22% on Wednesday, and down 17%. Thursday, then it’s likely that we will not come close to reaching 3X returns. You might achieve a -X% return. Another way of generating inferior returns is to employ a buy-and-hold strategy for the 3X Long Bugaboo Blast Daily ETF.
To get back to our reality-based example of MicroStrategy and the LMI3 ETF, here’s a summary of investment strategies that have proven to produce adverse outcomes:
You get the gist of where this is headed. Or at least, I hope you get the gist. For further edification, here is a comparative chart of the return of MicroStrategy stock versus the return of the LMI3 ETF. The blue tracking line represents the return of MicroStrategy since January 2024. The red tracking line represents the return of the GraniteShares 3X Long MicroStrategy Daily ETP. You might understand the confusion of a private investor who thought they would obtain a 3X retorn on 110%. -81% is about as far away as can be imagined!
Conclusions
The GraniteShares 3X Long MicroStrategy Daily ETP is just the kind of investment designed for savvy investors looking for opportunities to enhance their daily returns. It is in no way, shape, or form an investment product for an individual investor. In its most common form, it is a tool created by Wall Street for Wall Street as a means to suck people into thinking they are more intelligent than they genuinely are. When investors open their latest statements, the difference between a +110% return and a -81 % return can be pretty shocking. Granted, an individual investor shouldn’t invest in LMI3, regardless of the potential return.
As with most things in life, when things seem too good to be true, they are. Certainly, GraniteShares’ LMI3 fits that mold. Even if the idea of 3X MicroStrategy’s stock returns were plausible, the volatility and costs would leave returns much to be desired. Our advice at Nintai remains straightforward: find a low-cost index fund, rebalance when required, and let compounding work its magic.
DISCLOSURE: NONE
As of publication, Nintai Investments LLC has no shares or plans to purchase shares cited in the article.
[1] I am deeply indebted to Katie Griefield’s research done for her article “One-Day-Only ETFs Are Jack Bogles Nightmare Brought To Life.” The article can be found here.
[2] Ibid
- Albert Hastings II
Over the years, I’ve written about a range of gimmicks that Wall Street has successfully (most of the time) pawned off to entice individual investors. These have ranged from funds that track highly focused political angles (such as a MAGA fund) to the reverse-IPO model of special purpose acquisition companies (SPAC). Almost always, these products serve the best interests of Wall Street rather than individual investors. This is usually achieved through excessive management fees combined with underperformance.
Bloomberg and Morningstar recently discussed a new Wall Street bonanza designed to capitalize on MicroStrategy’s investment in Bitcoin. As with many Wall Street offerings, the product capitalized on the hottest new trend with an overlay of unmitigated greed—for industry players rather than individual investors.
Microstrategy, Bitcoin, and the Horror of 3X Single Stock ETFs
In mid-2020, MicroStrategy (NASDAQ: MSTR), a Virginia-based software analytics and services company, announced it would use Bitcoin as a component of its treasury reserve policy and as part of management’s stock price strategy. By the end of the year, MSTR had amassed roughly 105,000 bitcoins, spending approximately $2.5B. The acquisition was financed by issuing over $2B in corporate debt. By utilizing this strategy, MicroStrategy made itself more of a bet on the price of Bitcoin than on the business strategy and dynamics of its underlying business.
The decision to utilize Bitcoin as a valuation tool immediately drove a series of non-investment players to the company’s stock. People who loved Bitcoin saw Bitcoin as a growth tool or wanted to be in on the newest hipster player on Wall Street, and they were all looking for new ways to invest in MicroStrategy stock.
One of the most aggressive (or egregious as the case may be) players who saw a way to turbocharge an investor’s gains (or losses) was GraniteShares. The company is a UK-based issuer of exchange-traded funds (ETFs) focusing on leveraged single-stock ETFs. The idea is quite simple – if you like a company’s return, you’ll love an ETF that triples it (or its loss). One might think (and you’d be right) that it would be cheaper and safer to buy three times as many shares of your holding if you’d like to capture more potential gains. Let me explain why this is the case with our good friend MicroStrategy stock.
For those investors who can’t get enough of MicroStrategy’s play on bitcoin, GraniteShares 3x Long MicroStrategy Daily ETP (LMI3) is just the ticket. With only $11M in assets under management, this is about as small and focused as an individual can find. The idea behind the ETP is simple. LMI3 is an exchange-traded product that offers investors three times the daily return of MicroStrategy’s stock. If MicroStrategy goes up 3% on Monday, LMI3 goes up 9%. If MicroStrategy goes down 5% on Tuesday, LMI decreases 15%.
It all seems pretty straightforward until the idea hits a terrible wall, similar to Jack Bogle’s “tyranny of compounding costs.” For those who purchased the product thinking they would triple their gains when the stock went up, consider these returns: In 2024, MicroStrategy stock rose by 100%. In that same period, LMI3 dropped by roughly 82%. This return dynamic remains valid for one, three, and six months.[1]
Something’s Fishy in ETF-Land
For any investor who purchased LMI3 last year to triple investment in MicroStrategy’s stock price and opened their brokerage account statement 6 months later, they were sadly abused by their strategy. For all those investors who filed complaints about their returns, it was in the disclosure provided by GraniteShares. Investors are told not to hold the instruments for the long term. They are frequently called “Same-Day” or “One-Day-Only” ETFs. The ability to triple your returns (or losses) is limited to….wait for it….only the first day.
You own the ETF. (That description is generally accurate. There are ways to achieve these results over an extended period, but you need an advanced degree in mathematics to get there.) Greifield writes in her article:
“LMI3 does a good job of giving you three times the daily return of MicroStrategy but a horrific job of giving you three times the year-to-date return of MicroStrategy. (It gives approximately negative 0.8 times the year-to-date return.) The funds offer amped-up exposure only to a stock’s one-day return given that the daily rebalancing of the options book erodes returns over time.”
There’s a lot to unbundle here. That should tell most individual investors they are way over their heads, but that’s never been a significant deterrent on Wall Street. Here’s why the numbers seem so out of whack.
First, the ETF is designed to give an investor triple the return of the daily return of the stock on the day you buy it. The leverage is recalculated daily, so the fund starts fresh each morning with the current market price. This can lead to significant deviations from the underlying index over longer periods if the market experiences considerable volatility. This leads us to the second point. Volatility is fatal in the design of these ETFs. If the stock increased by 1% every day with no deviation, the ETF would act in the manner most investors assume they purchased it for. Unfortunately, volatility is disastrous for ETFs like LMI3. Because most of the stocks underlying triple-leveraged ETFs are highly volatile, holding a 3x leveraged single-stock ETF for more than a week can lead to shocking results.
A Bugaboo Example
Let’s use a generic example to show why these two caveats are so vital to the returns of ETFs like LMI3. At the beginning of the trading week, an investor decides to invest in 3X Long Bugaboo Blast Daily ETF. Shares of the ETF trade for $100 per share. Shares for Bugaboo trade at the same price - $100 per share. (I know. I know. The odds of that happening are nil, but they make the example easier to work through.) The ETF is designed to expose you to the returns of three shares of Bugaboo.
On Monday, Bugaboo’s share price increased by 10%, which means that the ETF's share price will increase by 30%. The stock is now worth $110/share, and the ETF is worth $130/share. So far, so good. On Tuesday, the investor adds an additional share to your portfolio. At this point, the ETF must expose the investor to three times $130 worth of stock or 3.55 shares. On Wednesday, the stock price jumped another 10% (this investor knows how to pick stocks!). That means at the end of the trading day on Wednesday, the stock price sits at $121/share, and the ETF is at $169/share. ETF needed to purchase more shares on Monday and Tuesday nights to meet these requirements.
Here’s a much simpler way to look at how the ETF operates: “Every time the stock goes up X% and then down Y%, the ETF goes up 3X%, and then down 3Y% of a bigger number, so the loss is greater. And every time the stock goes down Y% and then up X%, the ETF goes down 3Y% and then up 3X% of a smaller number, so the gain is smaller. The ETF is forced to buy shares every time they go up and sell shares every time they go down, which has to be a drag on returns.”[2]
Katie Greifield points out that these intuitions only work if the stock steadily goes up or down. Suppose the stock prices see wide price swings, like up 16% on Monday, down 19% on Tuesday, up 22% on Wednesday, and down 17%. Thursday, then it’s likely that we will not come close to reaching 3X returns. You might achieve a -X% return. Another way of generating inferior returns is to employ a buy-and-hold strategy for the 3X Long Bugaboo Blast Daily ETF.
To get back to our reality-based example of MicroStrategy and the LMI3 ETF, here’s a summary of investment strategies that have proven to produce adverse outcomes:
- Investing for the long-term.
- Investing for the medium term.
- Investing for more than three days.
- Investing during mild volatility.
- Investing during high volatility.
- Investing thinking you will get 3X the return of MicroStrategy stock.
You get the gist of where this is headed. Or at least, I hope you get the gist. For further edification, here is a comparative chart of the return of MicroStrategy stock versus the return of the LMI3 ETF. The blue tracking line represents the return of MicroStrategy since January 2024. The red tracking line represents the return of the GraniteShares 3X Long MicroStrategy Daily ETP. You might understand the confusion of a private investor who thought they would obtain a 3X retorn on 110%. -81% is about as far away as can be imagined!
Conclusions
The GraniteShares 3X Long MicroStrategy Daily ETP is just the kind of investment designed for savvy investors looking for opportunities to enhance their daily returns. It is in no way, shape, or form an investment product for an individual investor. In its most common form, it is a tool created by Wall Street for Wall Street as a means to suck people into thinking they are more intelligent than they genuinely are. When investors open their latest statements, the difference between a +110% return and a -81 % return can be pretty shocking. Granted, an individual investor shouldn’t invest in LMI3, regardless of the potential return.
As with most things in life, when things seem too good to be true, they are. Certainly, GraniteShares’ LMI3 fits that mold. Even if the idea of 3X MicroStrategy’s stock returns were plausible, the volatility and costs would leave returns much to be desired. Our advice at Nintai remains straightforward: find a low-cost index fund, rebalance when required, and let compounding work its magic.
DISCLOSURE: NONE
As of publication, Nintai Investments LLC has no shares or plans to purchase shares cited in the article.
[1] I am deeply indebted to Katie Griefield’s research done for her article “One-Day-Only ETFs Are Jack Bogles Nightmare Brought To Life.” The article can be found here.
[2] Ibid
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