Defiance Goes Mad ‘Maxx’ on Single-Stock ETFs

Why settle for regular exposure when you can have the maxx?

Defiance ETFs filed last week for 56 long-dated call-option ETFs, largely single-stock funds tied to tech and AI companies. The funds include tickers tied to Anthropic, OpenAI and Samsung, as well as a few tied to other ETFs, like the Invesco QQQ Trust (QQQ), the Grayscale Bitcoin Mini Trust ETF (BTC) and the SPDR Gold Shares ETF (GLD). The funds would employ something called the “PowerMaxx strategy,” which structures long-only call options in a manner intended “to provide a predetermined outcome” at an accelerated rate relative to underlying securities, according to the filings. 

“This just adds to the single-stock appetite that some investors have, where they’re looking for these juiced up exposures to these popular tech names or other popular strategies like cryptocurrencies or commodities,” said Roxanna Islam, head of sector and industry research at VettaFi. “Investors are using these ETFs as trading tools.” 

Mad Maxx: Blurry Road

The ETFs look like leveraged funds at first glance, but might be more similar to accelerated defined-outcome ETFs, which use options to cap upside and downside, Islam said. “It’s kind of vague in the sense that it provides accelerated returns and possibly accelerated losses,” she said. “It is a little bit unclear what the ultimate goal is.” 

How the PowerMaxx strategy works is indeed a question, and Defiance did not immediately respond to a request for comment. “I would assume that there are multiple options that they’ll be buying at different times, but they will all be correlated to one another,” said Bryan Armour, Morningstar’s director of ETF and passive strategies research. The SEC has a 2x leverage limit, “but for most of the life of the option, it would not be providing that much leverage or exposure relative to the underlying stock.” He added that given the risk and fees involved, investors that are interested in a company might be better served by just buying the stock itself.

Beyond Thunderdome: All funds that seek to amplify returns of a given stock are speculative. The PowerMaxx strategy, which doesn’t define how much leverage the funds are seeking, might be even riskier, securities lawyer Adam Gana said. “Investors need to understand how much leverage and how much risk they’re actually taking,” he said. “It seems like it’s purchasing call options with different strike prices and expirations to pursue some sort of leveraged, souped-up strategy. And what that means to your average investor is literally nothing.”