10-K: Dynamic Shares Trust 2023 Annual Report: Volatility ETF Performance and Risk Analysis

Dynamic Shares Trust's 2023 annual report details the performance and risk management of its Dynamic Short Short-Term Volatility Futures ETF, highlighting its unique algorithm-driven approach to shorting VIX futures contracts.

Summary

• Dynamic Shares Trust operates a single series, the Dynamic Short Short-Term Volatility Futures ETF, which commenced investment operations on January 12, 2022.
• The ETF seeks to achieve its investment objective by taking short positions in VIX futures contracts, with a notional exposure ranging from -0.1 to -0.5 under normal circumstances.
• The fund uses a proprietary algorithm to adjust its notional exposure based on VIX futures contract prices and contango trends.
• The algorithm aims to reduce exposure during periods of potential losses and maintain exposure during periods of potential profits.
• The fund's shares are listed on the NYSE Arca and are offered and redeemed in Creation Units of 50,000 shares by Authorized Participants.
• The fund's net assets increased from $2,722,929 at the beginning of 2023 to $6,942,895 at the end of 2023, with shares outstanding increasing from 150,005 to 250,005.
• The fund's per share NAV increased by 53% during 2023, primarily due to decreased VIX futures prices and contango.
• The fund's net investment income was $110,625, and net realized gain was $1,475,884 for the year ended December 31, 2023.
• The fund's management fee is 1.85% per annum of its average daily net assets, with the sponsor covering certain brokerage commissions exceeding 0.6% of average net assets annually.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook due to the fund's growth and performance in 2023, but also highlights significant risks associated with its investment strategy and market conditions. The sentiment is cautiously optimistic.

Positives

• The fund's algorithm aims to dynamically manage risk by adjusting notional exposure based on market conditions.
• The fund experienced significant growth in net assets and per share NAV during 2023.
• The sponsor covers certain brokerage commissions, potentially reducing costs for the fund.
• The fund's structure as a commodity pool allows for investment in VIX futures contracts.

Negatives

• The fund's performance is highly dependent on the success of its proprietary algorithm, which may not always anticipate market movements.
• The fund is subject to significant market risk due to its exposure to VIX futures contracts, which can be highly volatile.
• The fund's use of leverage can magnify losses.
• The fund's investment strategy may result in high portfolio turnover, increasing transaction costs.
• The fund is not actively managed by traditional methods, which may lead to unexpected losses.
• The fund's lack of operating history makes it difficult to predict future results.
• The fund is non-diversified, which increases the risk of losses if its investments decline in value.

Risks

• The fund's algorithm may not accurately predict market movements, affecting investment returns.
• The fund's lack of operating history makes it difficult to predict future performance.
• The fund is subject to counterparty risk, credit risk, and liquidity risk.
• The fund's use of leverage can magnify losses.
• The fund's investment in VIX futures contracts is subject to market volatility and may result in significant losses.
• The fund's performance is affected by contango and backwardation in the VIX futures market.
• The fund is subject to regulatory risks as a commodity pool.
• The fund's shares may trade at a premium or discount to NAV.
• The fund is subject to risks associated with short selling.
• The fund is subject to risks associated with natural disasters and epidemics.
• The fund is subject to risks associated with the Russian Federations invasion of Ukraine.
• The fund is subject to risks associated with cyber attacks.
• The fund is subject to risks associated with changes in U.S. federal income tax law.
• The fund is subject to risks associated with regulatory changes or actions.

Future Outlook

The fund seeks to achieve its investment objective by obtaining exposure to an actively managed portfolio of short positions in VIX Futures Contracts. The fund expects to have a constant one-month rolling short position in first and second month VIX Futures Contracts under normal circumstances.

Management Comments

• The Sponsor believes it is unlikely that any brokerage commissions on VIX Futures Contracts will exceed 0.6% of the Funds average net assets annually and does not expect that it will be responsible for any brokerage commissions on VIX Futures Contracts in normal market conditions.
• Management believes that the financial statements and related financial information included in this Form 10-K fairly present in all material respects our financial condition, results of operations as of the dates presented, and for the periods ended on such dates, in conformity with GAAP.

Industry Context

This announcement is relevant to the broader trend of investors seeking alternative investment strategies, particularly those that provide inverse exposure to market volatility. The fund's unique algorithm-driven approach differentiates it from traditional short VIX ETFs.

Comparison to Industry Standards

• The fund's strategy of dynamically adjusting notional exposure differs from traditional short VIX ETFs that maintain a fixed exposure.
• The fund's management fee of 1.85% is within the range of fees charged by similar actively managed ETFs.
• The fund's performance is subject to the same risks as other volatility-linked products, including market risk, counterparty risk, and liquidity risk.
• The fund's use of a proprietary algorithm is a unique feature that may provide an advantage over other similar products, but also introduces additional risk.

Stakeholder Impact

• Shareholders are exposed to the risks and rewards of the fund's investment strategy, including the potential for significant losses.
• Authorized Participants are responsible for creating and redeeming Creation Units, and may be subject to transaction fees.
• The sponsor is responsible for managing the fund and ensuring compliance with regulatory requirements.
• Service providers, such as the administrator, custodian, and transfer agent, play a critical role in the fund's operations.

Next Steps

• The fund will continue to implement its investment strategy, seeking to achieve its investment objective by taking short positions in VIX futures contracts.
• The fund will continue to use its proprietary algorithm to dynamically adjust its notional exposure based on market conditions.
• The fund will continue to monitor and manage its risks, including market risk, counterparty risk, and liquidity risk.

Key Dates

Keywords

Volatility, VIX Futures, Inverse ETF, Short Selling, Algorithm Trading, Commodity Pool, Leverage, Derivatives, Contango, Backwardation