If You Invested in Defiance 2X Daily Long Pure Quantum ETF (QPUX)

The Defiance 2X Daily Long Pure Quantum ETF (ticker: QPUX) is an exchange-traded fund sponsored by Defiance ETFs that seeks to provide amplified exposure to a focused group of quantum computing companies. According to Defiance, QPUX is designed to deliver daily investment results, before fees and expenses, equal to 200% of the daily performance of an equal-weighted target portfolio of selected quantum computing stocks. The fund is positioned for investors who want concentrated, leveraged exposure to the quantum computing segment of the technology market.

Core investment objective and structure

QPUX aims to achieve 2X daily leveraged exposure to an equal-weighted basket of four quantum computing companies: IONQ, Inc. (IONQ), Rigetti Computing, Inc. (RGTI), D-Wave Quantum Inc. (QBTS), and Quantum Computing Inc. (QUBT). The target portfolio is rebalanced daily to maintain equal weighting among these four holdings. To pursue its objective, the fund uses derivatives, including swap contracts and listed options, that are based on the performance of this basket.

The fund’s stated objective is limited to daily results. Over holding periods longer than a single trading day, the effects of compounding can cause the fund’s performance to differ, potentially significantly, from two times the cumulative performance of the target portfolio. The sponsor notes that an investor could lose the full principal value of an investment in a very short period, including within a single day.

Focus on pure quantum computing companies

QPUX concentrates its exposure on companies that Defiance describes as dedicated to quantum computing hardware, software, and related technologies. The target portfolio currently consists of IONQ, RGTI, QBTS, and QUBT, and the fund’s performance is tied to the trading prices and market behavior of these securities. The fund’s documentation highlights that these companies operate in the quantum computing industry and may be affected by rapid technological change, competitive pressures, regulatory developments, patent disputes, and the risk of product obsolescence.

Because QPUX is non-diversified and focused on a small number of issuers in a single industry, it may experience higher volatility than funds that spread risk across many sectors or a larger number of holdings. The sponsor also notes that many companies in the quantum computing industry have limited operating histories and can exhibit high price volatility.

Use of derivatives and leverage

To obtain its 2X daily exposure, QPUX invests in derivatives such as swap agreements and options contracts that reference the target portfolio. These instruments create the economic effect of financial leverage by increasing the fund’s exposure to movements in the underlying quantum computing stocks. As a result, QPUX is subject to several risks associated with derivatives, including imperfect correlation with the underlying securities, higher price volatility, liquidity constraints, valuation challenges, counterparty risk, and the potential for losses that may exceed the initial investment in the derivatives.

The fund’s materials emphasize leverage risk and compounding risk. Because the fund seeks a multiple of daily returns, its performance over periods longer than one day depends on the path of daily returns, not just the overall change in the target portfolio. In volatile markets, this can lead to outcomes that are materially different from simply twice the cumulative return of the underlying basket.

Investor profile and risk considerations

Defiance states that QPUX is intended for knowledgeable, active traders who understand leveraged ETFs and are willing and able to monitor their portfolios frequently. The fund is not described as suitable for investors who do not intend to actively manage their positions or who are uncomfortable with the possibility of substantial and rapid losses. The sponsor notes that the fund may lose money if the performance of the target portfolio is flat over time, and it is possible for the fund to lose money even if the target portfolio increases in value over periods longer than a single day.

Key risks identified for QPUX include:

• Underlying securities trading risk: The trading prices of IONQ, RGTI, QBTS, and QUBT may be highly volatile and subject to wide fluctuations.
• Underlying securities performance risk: One or more companies in the target portfolio may fail to meet business targets or market expectations, which could negatively affect their share prices and the fund’s performance.
• Quantum computing industry risk: The industry may be significantly affected by technological change, competition, regulation, patent issues, and product obsolescence.
• Foreign securities risk: Exposure to non-U.S. issuers can involve risks different from domestic investments and may lead to more rapid and extreme changes in value.
• Liquidity risk: Some securities or instruments held by the fund may be difficult to sell, especially during market stress.
• High portfolio turnover risk: Frequent trading can increase transaction costs and may have tax implications for investors.
• Non-diversification, concentration, and issuer risk: Focusing on a small number of quantum computing companies can make the fund more volatile than broadly diversified investments.

Role within the Defiance ETF lineup

Defiance, founded in 2018, describes itself as an ETF issuer specializing in thematic, income, and leveraged ETFs, including leveraged single-stock products. QPUX fits within this framework as a thematic, leveraged ETF targeting quantum computing. The sponsor positions QPUX as a tool for investors who want amplified exposure to what it characterizes as a transformative technology sector, implemented through a daily leveraged structure tied to a defined basket of quantum computing companies.

Trading and structure as an ETF

As an exchange-traded fund, QPUX issues shares that trade on an exchange at market prices, which may differ from the fund’s net asset value (NAV). The sponsor notes that ETF shares are bought and sold in the secondary market and are not individually redeemed from the fund by most investors. The fund may trade at a premium or discount to NAV, and brokerage commissions may apply when buying or selling shares.

QPUX is described as a newly formed fund with no operating history at the time of launch, which means there is limited historical performance information available for evaluation. Investors are directed in the fund’s disclosures to review the prospectus and summary prospectus for detailed information on objectives, risks, charges, and expenses before investing.