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In a year that has seen 650 US ETF launches, shattering 2023’s record by 150 launches, Morningstar has branded two leveraged ETFs as the worst of the bunch.
The $2.2bn Defiance Daily Target 2X Long MSTR ETF took the crown of the year’s worst ETF, according to Bryan Armour, Morningstar’s director of passive strategies research, wrote in an article published earlier this month.
That ETF is a “Russian nesting doll” of problems, beginning with MicroStrategy itself, the single stock the ETF tracks, he wrote.
“MicroStrategy, as a company, is essentially a leveraged play on bitcoin, since its main operation is raising cash to buy and hold bitcoin,” Armour wrote.
This article was previously published by Ignites, a title owned by the FT Group.
The Defiance ETF doubles down on a stock already serving as a leveraged bitcoin proxy, layering on structural flaws such as imprecise swaps and volatility drag, he wrote.
Meanwhile, the $13mn YieldMax Short NVDA Option Income Strategy ETF tempts investors with high-yield potential but courts massive downside risk through complex derivatives, Armour wrote.
Overall, both products exemplified how high fees and excessive risk can undermine long-term returns, he noted.
On the flip side, two ETFs stood out by bringing proven, active strategies to the space: Jensen’s $70mn Quality Growth ETF and Neuberger Berman’s $216mn Small-Mid Cap ETF, Armour wrote.
Jensen’s mirrors its $8.6bn mutual fund sibling, which boasts decades of competitive returns with lower volatility.
Similarly, Neuberger Berman’s ETF offers its $11.1bn Genesis Fund sibling’s mid-cap strategy.
This marks the second consecutive year in which a YieldMax ETF was named one of the year’s worst launches. Last year, the firm’s AI Option Income Strategy took that crown, alongside the AdvisorsShares 2x Bitcoin Strategy ETF.
In 2023, the winners were BlackRock’s Flexible Income ETF and Schwab’s High Yield Bond ETF.
Morningstar has named its favourite and least favourite ETF launches since 2015.
The inaugural winners of favourite status were the Vanguard Tax Exempt Bond ETF and Goldman Sachs ActiveBeta US Large Cap Equity ETF. The losers that year were the GlobalX SuperDividend Alternatives ETF and the AdvisorShares Restaurant ETF.
*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.
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