10-K/A: Dynamic Shares Trust Files Amended 10-K, Restating Financials to Include Trust Level Data

Dynamic Shares Trust has filed an amended annual report on Form 10-K to include combined financial information for the Trust, in addition to the Dynamic Short Short-Term Volatility Futures ETF.

Summary

• Dynamic Shares Trust filed an amended 10-K report to include combined financial information for the Trust and its single series, the Dynamic Short Short-Term Volatility Futures ETF.
• The Fund seeks to provide investment exposure to an actively managed portfolio of short positions in VIX futures contracts, with a notional exposure ranging from -0.1 to -0.5 under normal circumstances.
• The Fund primarily takes short positions in the next two near-term VIX futures contracts, rolling the nearest month contract to the next month daily, aiming for a constant one-month rolling short position.
• The Fund's algorithm adjusts notional exposure based on VIX futures prices and contango trends, aiming to reduce exposure during periods of potential losses and maintain exposure during periods of potential profits.
• The Fund had 150,005 shares outstanding as of March 31, 2023, with a market value of $1,771,828 held by non-affiliates.
• The Fund's net assets were $2,722,929 as of December 31, 2022, with a net asset value per share of $18.15.
• The Fund experienced a net loss of $276,868 for the year ended December 31, 2022, primarily due to the increased level of VIX futures prices and the compounding effect of leverage.
• The Sponsor voluntarily lowered the management fee to 0.50% per annum from 1.85% effective April 1, 2022, for at least 12 months.
• The Fund's investment strategy is expected to result in high portfolio turnover, which will increase transaction costs.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While the fund has a unique algorithm and reduced management fees, it also experienced a net loss and has significant risks associated with its investment strategy. The sentiment is therefore cautiously negative.

Positives

• The Sponsor has implemented an algorithm to actively manage the Fund's exposure to VIX futures contracts, aiming to optimize risk and returns.
• The Sponsor voluntarily lowered the management fee to 0.50% per annum, which will reduce expenses for investors.
• The Fund's strategy is designed to potentially outperform traditional short VIX ETFs during periods of market volatility.

Negatives

• The Fund experienced a net loss of $276,868 for the year ended December 31, 2022.
• The Fund's investment strategy is expected to result in high portfolio turnover, which will increase transaction costs.
• The Fund's performance is subject to the compounding effect of daily returns, which can lead to unexpected results over longer periods.
• The Fund is subject to risks associated with short selling, including potentially unlimited losses.

Risks

• The Fund's algorithm may not accurately predict market movements, affecting investment returns.
• The Fund is not actively managed by traditional methods and seeks to remain fully invested regardless of market conditions, which may lead to unexpected losses.
• The Fund's lack of operating history makes it difficult to predict future results.
• The Fund is subject to credit risk with respect to counterparties to financial instruments.
• Gains or losses in VIX futures contracts may be magnified and greater than the original cost.
• The Fund is subject to daily variation margin calls, which could be substantial in the event of adverse price movements.
• The Fund's performance for periods greater than a single day will be the result of each day's returns compounded over the period, which may not align with the stated daily inverse investment objective.
• The Fund is non-diversified, which could lead to greater losses if the value of its investments declines.
• An increase in the level of VIX futures contracts could result in the loss of an investor's investment.
• The Fund's investment in derivative instruments generally requires a small investment relative to the amount of investment exposure assumed, which may give rise to losses that exceed the amount invested.
• The Fund is subject to liquidity risk, as some of its investments may be less liquid than other types of investments.
• The Fund is subject to market risk, and the value of its investments may fluctuate significantly from day to day.
• The Fund is subject to short sale risk, and the loss on a short sale is theoretically unlimited.
• The Fund is subject to volatility risk, as VIX futures contracts can be highly volatile and may experience large losses.
• The Sponsor has no experience operating commodity pools, and the management lacks experience in managing a sponsor, trust, or fund.
• The Fund is subject to regulatory risk, and changes in regulations may alter its operations and profitability.
• The Fund is subject to trading risk, and there is no assurance that an active trading market for shares will develop or be maintained.
• The Fund is subject to natural disaster/epidemic risk, and such events can cause substantial market volatility and impact the ability of the Fund to complete redemptions.
• The Fund is subject to the risk that current assumptions and expectations could become outdated as a result of global economic shocks.
• The Fund is subject to the risk that the value of a share may be influenced by nonconcurrent trading hours between the NYSE Arca and the market in which the VIX Futures Contracts held by the Fund are traded.
• The Fund is subject to the risk that the NAV may not always correspond to market price and, as a result, investors may be adversely affected by the creation or redemption of Creation Units at a value that differs from the market price of the Shares.
• The Fund is subject to the risk that the Shares of the Fund are new securities products and their value could decrease if unanticipated operational or trading problems arise.
• The Fund is subject to the risk that investors may be adversely affected by redemption or creation orders that are subject to postponement, suspension or rejection under certain circumstances.
• The Fund is subject to the risk that an investor may be adversely affected by lack of independent advisers representing investors.
• The Fund is subject to the risk that the possibility of termination of the Fund may adversely affect an investor's portfolio.
• The Fund is subject to the risk that the Shares of the Fund may trade on the Exchange below their net asset value.
• The Fund is subject to the risk that competing claims of intellectual property rights may adversely affect the Fund and an investment in the Shares.
• The Fund is subject to the risk that investors may be adversely affected by an overstatement or understatement of the NAV calculation of the Fund due to the valuation method employed on the date of NAV calculation.
• The Fund is subject to the risk that shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect investors investment in the Shares.
• The Fund is subject to the risk that NYSE Arca may halt trading in the Shares of the Fund, which would adversely impact investors ability to sell Shares.
• The Fund is subject to the risk that shareholders do not have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights.
• The Fund is subject to the risk that the value of the Shares will be adversely affected if the Fund is required to indemnify the Trustee.
• The Fund is subject to the risk that although the Shares of the Fund are limited liability investments, certain circumstances such as bankruptcy of the Fund will increase a shareholders liability.
• The Fund is subject to the risk that shareholders do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act.
• The Fund is subject to the risk that failure of the FCM(s) to segregate assets may increase losses in the Fund.
• The Fund is subject to the risk that a court could potentially conclude that the assets and liabilities of the Fund are not segregated from those of another series of the Trust and may thereby potentially expose assets in the Fund to the liabilities of another series of the Trust.
• The Fund is subject to the risk that there may be circumstances that could prevent or make it impractical for the Fund to operate in a manner consistent with its investment objective and principal investment strategy.
• The Fund is subject to the risk that due to the increased use of technologies, intentional and unintentional cyber-attacks pose operational and information security risks.
• The Fund is subject to the risk that shareholders tax liability will exceed cash distributions on the Shares.
• The Fund is subject to the risk that shareholders will receive partner information tax returns on Schedule K-1, which could increase the complexity of tax returns.
• The Fund is subject to the risk that investors could be adversely affected if the current treatment of long-term capital gains under current U.S. federal income tax law is changed or repealed in the future.
• The Fund is subject to the risk that shareholders of the Fund may recognize significant amounts of ordinary income and short-term capital gain.
• The Fund is subject to the risk that changes in U.S. federal income tax law could affect an investment in the Shares.
• The Fund is subject to the risk that regulatory changes or actions, including the implementation of new legislation, may alter the operations and profitability of the Fund.
• The Fund is subject to the risk that regulatory and exchange daily price limits and accountability levels may restrict the creation of Creation Units and the operation of the Trust.
• The Fund is subject to the risk that in the event that the Fund fails to comply with its obligations under a Futures Account Agreement, the Futures Account Agreement typically will provide the FCM with broad discretion to take remedial action against the Fund.
• The Fund is subject to the risk that if trading is not possible or if the Fund determines not to close a futures position in anticipation of adverse price movements, the Fund may be required to make daily cash payments of variation margin.
• The Fund is subject to the risk that money market instruments are short-term debt instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles.
• The Fund is subject to the risk that the guarantee of a clearing house (associated with a futures exchange) of performance on open positions does not run to customers and, as a result, if a member firm goes bankrupt, customers could lose money.
• The Fund is subject to the risk that the Funds investments in VIX Futures Contracts will be subject to regulation under the CEA and traded pursuant to CFTC and applicable exchange regulations which may authorize special emergency actions to halt, suspend or limit trading overall or to restrict, halt, suspend or limit the trading of an individual trader or to otherwise impose special reporting or margin requirements.
• The Fund is subject to the risk that once the daily limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
• The Fund is subject to the risk that when the market value of a particular open futures contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker and if the margin call is not met within a reasonable time, the broker may close out the traders position.
• The Fund as well as the Sponsor and its service providers are vulnerable to the effects of public health crises, including the ongoing COVID-19 pandemic.
• The Fund is subject to the risk that market values of the investments by the Fund can be negatively impacted by liquidity, credit deterioration or losses, financial results, changes in interest rates, or other factors and, as a result, the value or liquidity of the cash equivalents and marketable securities of the Fund could decline and result in a material impairment, which could materially adversely affect our financial condition and operating results.

Future Outlook

The Sponsor has indicated its intention not to extend the Voluntary Waiver beyond the Initial Waiver Period, but may elect to extend it in its sole discretion. The Fund will provide at least thirty (30) days prior notice of the termination of the Voluntary Waiver.

Management Comments

• The Sponsor expects the algorithm to slightly increase the Funds notional exposure when the price of VIX Futures Contracts go up to a level not beyond -0.5.
• The Sponsor expects the algorithm to decrease the Funds notional exposure to lower levels to prepare for potential upcoming spikes in the price of VIX Futures Contracts when the price of VIX Futures Contracts goes down.
• 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.

Industry Context

This document relates to a specialized exchange-traded fund (ETF) that provides inverse exposure to volatility through VIX futures contracts. This type of product is designed for sophisticated investors who understand the risks associated with leveraged and inverse investments. The ETF's performance is highly dependent on the volatility of the market and the effectiveness of its proprietary algorithm.

Comparison to Industry Standards

• The Dynamic Short Short-Term Volatility Futures ETF is similar to other inverse volatility ETFs, such as the ProShares Short VIX Short-Term Futures ETF (SVXY), but it uses a proprietary algorithm to adjust its notional exposure, unlike SVXY which maintains a fixed notional exposure.
• The management fee of 1.85% (reduced to 0.50% for at least 12 months) is within the range of fees charged by similar specialized ETFs.
• The Fund's strategy of rolling VIX futures contracts daily is a common practice among volatility ETFs, but the specific implementation of the algorithm and the target exposure range of -0.1 to -0.5 are unique to this fund.
• The fund's use of a proprietary algorithm to manage exposure is a differentiator compared to other similar ETFs that use a fixed exposure strategy. This may lead to different performance outcomes depending on market conditions.
• The fund's risk disclosures are consistent with those of other leveraged and inverse ETFs, highlighting the potential for significant losses and the impact of compounding.

Stakeholder Impact

• Shareholders are exposed to the risks associated with leveraged and inverse investments, 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 is compensated through a management fee.
• The Fund's service providers, including the Administrator, Custodian, and Transfer Agent, are compensated for their services.

Next Steps

• The Sponsor will continue to manage the Fund's portfolio and monitor the performance of its algorithm.
• The Sponsor will decide whether to extend the voluntary waiver of the management fee beyond the initial 12-month period.
• The Fund will continue to offer and redeem shares in Creation Units to Authorized Participants.

Key Dates

Keywords

VIX Futures, Volatility, Inverse ETF, Short Selling, Derivatives, Commodity Pool, Leverage, Dynamic Shares Trust, Exchange Traded Fund, Futures Contracts