Defiance ETFs Files for First-of-Its-Kind Fund to Short Both Leveraged Long and Short MSTR ETFs

Defiance ETFs, a firm known for pushing boundaries in the exchange-traded fund (ETF) space, is taking a bold new step with a proposed fund that seeks to profit from the inherent structural weaknesses of leveraged ETFs. The newly filed Defiance MSTR Double Short Hedged ETF aims to simultaneously short both a 2x long and a 2x short leveraged ETF tied to MicroStrategy (now branded as “Strategy”), a company with deep exposure to Bitcoin.

The fund’s core strategy targets what’s known as “volatility decay”—a phenomenon where leveraged ETFs, due to their daily resetting nature, often lose value over time in choppy or sideways markets. While these products are designed for single-day exposure, holding them longer can lead to compounding losses—even if the underlying asset remains relatively flat. Defiance’s filing notes that the fund is “designed to benefit from the performance decay” that may occur when both long and short leveraged ETFs decline in value during volatile or range-bound trading periods.

This dual-short approach marks a first in the ETF world. According to Bloomberg ETF analyst Henry Jim, who first reported the filing, it's an unprecedented strategy. Fellow Bloomberg analyst Eric Balchunas echoed this sentiment on X (formerly Twitter), calling it “a new flavor of hot sauce” for the ETF market.

Interestingly, the ETF won’t use Defiance’s own leveraged funds. Instead, it will short “unaffiliated” products, meaning the fund will rely on ETFs managed by other providers. This choice suggests a desire to avoid potential conflicts of interest or simply to diversify exposure.

ETF industry veteran Rob Arnott, who recently shared that he’s been personally shorting both leveraged long and inverse ETFs, said the strategy isn’t “brilliant net of costs” but called it “fun and low risk.” Balchunas, however, cautioned retail investors, warning of potential tail risk if the market moves sharply in one direction. His advice? “Probably don’t try this at home.”

While the filing is still under review and the ETF isn’t yet available to investors, it represents a creative approach to navigating volatile markets—and offers a unique lens on how sophisticated strategies are evolving within the ETF landscape.