Why The SpaceX Trade Is On A Timer When Wrapped In Leverage

The public debut of  SpaceX (NASDAQ:SPCX) is now behind us, but for many investors, the journey is only just getting started. SpaceX shares have already jumped 42.6% from the IPO price of $135, and shares are up another 10.1% to $211.90 in this morning's pre-market. For those drawn to that volatility, one instrument on the table is the  Defiance Daily Target 2X Long SpaceX ETF (SPCU) , a fund with the goal to double the stock's daily move. But wrapping the SpaceX trade in leverage does something that can often be overlooked. It starts a timer.

Fees on holding a leveraged ETF

Think of it this way. Owning SpaceX shares outright is like owning a home: it can sit untouched for years and cost nothing to keep (maintenance aside). Wrapping the same SpaceX trade in a leveraged ETF is more akin to checking into a hotel. The charge stacks up each night you stay, and the bill arrives regardless of whether the trip was worth taking or not.

That nightly rate is the timer, and it consists of two elements. There is a management fee of 1.31% (which is well above a vanilla index fund) and there is the drag from the daily reset, which compounds against a position in choppy markets.

Why it's a different SpaceX trade

This is where the leveraged SpaceX trade parts ways with the stock it tracks. A SpaceX shareholder pays nothing to wait; they can sit through a flat month or a noisy quarter and come out the other side with the same value that their shares started with. Whereas a holder of the SPCU ETF may not. The clock runs from the day they buy, and the longer the SpaceX trade takes, the more of the eventual reward it could consume.

Now, that isn’t to say there are no upsides. A consistent string of green days can actually be favorable and produce a return that is more than double that of the underlying stock. However, a position in the Defiance Daily Target 2X Long SpaceX ETF ( and leveraged ETFs like it ) can be right about the direction and still finish behind, because the mechanics of the product do not reward being right long-term .

Defiance is upfront about this to avoid disappointment. Its own disclosures state that the fund can lose money even when the underlying stock rises over a longer period.

What type of SpaceX trade is the SPCU ETF?

None of this is a fault in the product. The SPCU ETF is engineered to be opened and closed inside one session, before the timer has a chance to matter. The mismatch only appears when a single-day instrument is asked to carry an investment over a multi-week (or longer) time frame.

It is worth pausing on that word, time, because for most investors it works in their favor. The whole logic of long-term investing rests on compounding, the powerful financial engine that allows returns to accrue on top of past returns, year after year. It is often called the eighth wonder of the world, and time is its one essential ingredient.

A daily-reset leveraged ETF runs that engine in reverse. For the patient shareholder, time is about as close to a free ally as investing gets. For the holder of a product like the SPCU ETF, it can be the opposite, with each passing day working against the position rather than for it. That does not make the fund good or bad. It simply means time is not your friend here, and whether that matters depends entirely on what you intend to do with it.

If you would like to understand exactly how that timer works in the context of the SpaceX trade, including the holdings and the single-day design, our full breakdown of what the SPCU 2X SpaceX ETF does, and doesn't do goes into more detail.

Disclaimers

The article was written independently by the author, without issuer input or approval. Defiance Analytics has a marketing services agreement with Simply Wall St, further details on compensation and other important information, please see our disclosure at the end of this article.

Investing involves risk, including possible loss of principal. Leveraged ETFs are not suitable for all investors and are designed to be used by knowledgeable investors who understand the consequences of seeking daily leveraged (2X) investment results. The Fund rebalances daily; for periods longer than a single day it will lose money if the underlying security's performance is flat, and may lose money even if the underlying security's performance rises over a period longer than a single day. An investor could lose the full principal value of their investment within a single day. The Fund should not be expected to provide two times the cumulative return of the underlying security for periods greater than a day. The Fund does not directly invest in the underlying stock. Past performance does not guarantee future results. Consider the investment objectives, risks, charges, and expenses carefully before investing. See the prospectus containing this and other information. Read it carefully before investing.

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Simply Wall St analyst Mitch Lawler and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.