Understanding Leverage in MSOX
MSOX seeks to leverage the daily investment performance of MSOS (before fees and expenses). MSOX is designed for those experienced investors seeking a cost-effective, simple way to add leveraged exposure to the US cannabis sector as a part of a diversified investment portfolio. It is important to clearly understand MSOX’s risks before making an investment. We encourage you to read the prospectus, which provides detailed information related to the ETFs’ investment objectives, principal investment strategies, risks, and costs. Trader Leverage
MSOX uses daily leverage that is intended to offer magnified exposure to the US cannabis sector. With trader leverage, it’s important to understand the effects of compounding. MSOX is designed to track the performance of MSOS for only one day. Due to the compounding of daily returns, holding periods of greater than one day can result in MSOX having returns that are significantly different than the return of MSOS.
Leverage makes it possible to make a larger investment with the same amount of money through the use of borrowed funds and allows the ETF to take greater advantage of price fluctuations.
Let’s look at a hypothetical example to understand how trader leverage could provide different returns over even a two-day period:
| Hypothetical Benchmark Return | Hypothetical 2x Daily of Benchmark Return | |
| + Trend | ||
| Day 1 | +5% | +10% |
| Day 2 | +5% | +10% |
| Compound 2-Day Return | +10.25% | +21% |
| – Trend | ||
| Day 1 | -5% | -10% |
| Day 2 | -5% | -10% |
| Compound 2-Day Return | -9.75% | -19% |
| +/- Trend | ||
| Day 1 | +5% | +10% |
| Day 2 | -5% | -10% |
| Compound 2-Day Return | -0.25% | -1% |
For illustrative purposes only. In the above example, the leverage did exactly what it was supposed to do – it produced daily returns that were two times benchmark returns. However, the examples also demonstrate how the leveraged performance can diverge from benchmark’s even over a short time span. The longer you hold a leveraged product, the compounding effect may cause more dramatic fluctuations and greater divergences.
So what happens if I hold MSOX longer than one trading day?
For some investors, there might be reasons that make it make sense to hold MSOX over periods longer than a single day but investors must understand that it does not provide two times the return of MSOS for any period longer than a day. So while you can get enhanced returns, it is also possible to see significant losses even if the long term performance of MSOS is positive. This can be especially true in a historically volatile sector like cannabis.
Volatility in Cannabis
Cannabis has been historically volatile. These higher levels of volatility can be useful when employing leverage but if unmanaged, it is possible to take on losses. Let’s look at some hypothetical levels of volatility and what that could mean for a leveraged fund:
| Underlying Index Return | Underlying Strategy Return | One Year Volatility Rate | ||||
| Cannabis’s volatility has historically been above the 50% rate, however as the industry grows and matures, we expect that volatility to decrease over time | ||||||
| Return | Return | 10% | 25% | 50% | 75% | 100% |
| -60% | -120% | -84.2% | -85.0% | -87.5% | -90.9% | -94.10% |
| -50% | -100% | -75.2% | -76.5% | -80.5% | -85.8% | -90.80% |
| -40% | -80% | -64.4% | -66.2% | -72.0% | -79.5% | -86.80% |
| -30% | -60% | -51.5% | -54.0% | -61.8% | -72.1% | -82.00% |
| -20% | -40% | -36.6% | -39.9% | -50.2% | -63.5% | -76.50% |
| -10% | -20% | -19.8% | -23.9% | -36.9% | -53.8% | -70.20% |
| 0% | 0% | -1.0% | -6.1% | -22.1% | -43.0% | -63.20% |
| 10% | 20% | 19.8% | 13.7% | -5.8% | -31.1% | -55.50% |
| 20% | 40% | 42.6% | 35.3% | 12.1% | -18.0% | -47.00% |
| 30% | 60% | 67.3% | 58.8% | 31.6% | -3.7% | -37.80% |
| 40% | 80% | 94.0% | 84.1% | 52.6% | 11.7% | -27.90% |
| 50% | 100% | 122.8% | 111.4% | 75.2% | 28.2% | -17.20% |
| 60% | 120% | 153.5% | 140.5% | 99.4% | 45.9% | -5.80% |
For illustrative purposes only.
Impact of Fees and Expenses on Net Asset Value (NAV) and Exposure
- Fees & Expenses: Management fees, borrowing costs, and operating expenses affect NAV over time.
- Borrowing Costs: MSOX uses derivatives, such as swaps, to achieve its exposure. The associated borrowing costs are reflected in the NAV.
- Compounding Effect: Especially in volatile markets, fees and performance fluctuations may cause the leveraged return to vary from the expected outcome over time. Refer to the compounding chart for more information.
End-of-Day (EOD) Effects on Exposure
- Volatility Considerations: Historically, there has been daily volatility, especially at the end of the trading day, which can cause large price swings.
- Price Dynamics: Near market close, prices can temporarily deviate from underlying asset values due to volatility.
- EOD Trading: Trades placed after MSOX has set its leveraged exposure for the day can lead to deviations from the intended 2x daily leverage, late-day market activity can impact the Fund’s exposure after the targeted leverage has been established.
- Exposure Impact: These factors may result in MSOX being above or below the targeted 2x daily leveraged exposure.
Ultimately, we’re excited to offer MSOX as a tool for cannabis investors who want to get amplified exposure to cannabis and who fully understand the benefits and risks of leverage in a volatile industry!
Still have questions?
We would love to help! Please reach out to us with any questions directly.
Leverage Too Much?
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Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus. Please read the prospectus and summary prospectus carefully before you invest. Foreside Fund Services, LLC, Distributor. The Fund is not suitable for all investors. The fund is designed to be utilized by only knowledgeable investors who understand the potential consequences of seeking 2x investment results understand the risks associated with the use of leverage, and are willing the monitor their portfolios frequently. The Fund is not intended to be used by and is not appropriate for investors who do not intended to actively monitor and manage their portfolios. An investor could lose the full principal value of their investment in a single day. The Fund is an actively managed ETF that seeks to provide investment results that are two times (2x) the daily total return, before fees and expenses, of the US Cannabis ETF, an affiliated ETF, by entering into one or more swaps agreements on the US Cannabis ETF. The Fund does not seek to achieve its stated investment objective for a period of time different than a single day. A single day is measured from the time the Fund calculates its net asset value (“NAV”) to the time of the Fund’s next NAV calculation. The Fund will enter into one or more swap agreements intended to produce economically-leveraged investment results relative to the returns of the US Cannabis ETF. The Fund may use a combination of swaps on the US Cannabis ETF and swaps on various investment vehicles that are designed to track the performance of the US Cannabis ETF. The Fund expects that cash balances in connection with the use of such financial instruments (“Collateral”) will typically be held in money market instruments or other cash equivalents. The Fund is subject to a number of risks that may affect the value of its shares. This section provides additional information about the Fund’s principal risks. The degree to which a risk applies to the Fund varies according to its investment allocation. Each investor should review the complete description of the principal risks before investing in the Fund. As with investing in other securities whose prices increase and decrease in market value, you may lose money by investing in the Fund. Cannabis-Related Company Risk – Cannabis-related companies are subject to various laws and regulations that may differ at the state/local and federal level. These laws and regulations may (i) significantly affect a cannabis-related company’s ability to secure financing, (ii) impact the market for marijuana industry sales and services, and (iii) set limitations on marijuana use, production, transportation, and storage. Cannabis-related companies may also be required to secure permits and authorizations from government agencies to cultivate or research marijuana. In addition, cannabis-related companies are subject to the risks associated with the greater agricultural industry, including changes to or trends that affect commodity prices, labor costs, weather conditions, and laws and regulations related to environmental protection, health and safety. Cannabis-related companies may also be subject to risks associated with the biotechnology and pharmaceutical industries. These risks include increased government regulation, the use and enforcement of intellectual property rights and patents, technological change and obsolescence, product liability lawsuits, and the risk that research and development may not necessarily lead to commercially successful products. Shares are bought and sold at market price not net asset value (NAV) and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined) and do not represent the return you would receive if you traded at other times.