Meme ETFs: An investment theme or a laughing "stock"?

Meme stocks have made headlines in 2021, emerging as a popular stock category among young investors. The goal according to their first adopters, is to "go the moon" by riding a herd of unjustified belief in a value of a company, fear of missing out (FOMO) or just for the fun of it, all while defying the fundamentals of investment theses and valuation common practices set by our economic forefathers.

ETF providers are always on the lookout for the latest market trends to push new products, but will they take the plunge and launch Meme ETFs?

What is a Meme Stock?

Meme Stocks are hard to define, they are neither growth nor value stocks. They are highly speculative, overpriced and are usually without fundamentals. They gain traction among millennials and Gen-Z traders through social media and can experience huge spikes or drops of prices in a short amount of time.

The Birth of Meme Stock

The meme stock mania started back in January 2021 when a group of Reddit traders in a forum called "Wallstreetbets" (WSB) began buying heavily shorted stocks and promoting them on social media platforms.

The first two meme stocks were born, AMC Entertainment (AMC) a listed American movie theater chain that was struggling during the Covid lockdowns and GameStop (GME), an American video game retailer who got disrupted by the internet. These failing companies were an obvious target for hedge funds that were trying to cash out on the miseries of the shares' performance. However out of nowhere, Reddit traders flocked to buy the shares, pumped the prices by more than 500% in January and ended up costing the short-sellers billions of dollars.

Since then, a whole range of meme stocks were identified by FOMO traders' radar and the frenzy took off.

Trading apps and free cash are also to blame for Meme Stock mania

In addition to social media and online investing communities, Robinhood and other commission-free trading apps opened up the stock market to the wider public and facilitated trading for young, low-income investors. Government stimulus checks and lockdowns got people bored and wondering what to do with their time and money, and eventually shifted their attention to the markets. With plenty of exposure on social media, amateur traders joined the Reddit campaigns and the rest was history.

Is there a Meme ETF?

By now, most people with access to internet know about Meme Stocks, some of them have already bought some and others are tempted to join the bandwagon. However, risks of owning Meme stocks are enormous and capital can be wiped out in minutes.

The dilemma left investors wondering if there's any ETF out there that offers a diversified exposure to a basket of Meme stocks. Despite some attempts by providers to target the segment, the answer is still officially no, but we may be getting there.

Roundhill Investments file for Meme ETF

On August 26th, Roundhill Investments filed with the U.S. Securities and Exchange Commission (SEC) the first ever Meme ETF. If the application gets approved and the launch is successful, the new ETF will trade on the New York Stock Exchange under the ticker MEME.

The registration filing says MEME "seeks to track the performance, before fees and expenses, of the Solactive Roundhill Meme Stock Index." The fund will screen stocks based on their social media activity and levels of short-interest; it will also rebalance every two weeks based on the holdings' "social media score" over the previous 14-day period. MEME will have an expense ratio of 0.69%.

Imagining MEME ETF holdings

Using a similar approach to Roundhill Investments selection strategy, we tried to imagine what would be MEME's top 15 holdings. A website called memestocks.org tracks the top mentioned tickers on the /r/wallstreetbets, the number one Meme stocks discussion platform on Reddit.

According to the website, the top 15 mentioned stocks in the last 24 hours are:

1. Clover Health Investments Corp (CLOV): operates as a Medicare Advantage insurer in the United States.
2. United States Steel Corporation (X): an integrated steel producer.
3. GameStop (GME): an American video game retailer
4. SoFi Technologies (SOFI): an online platform that provides financial services
5. Uber Technologies (UBER): provides ride-hailing and food delivery services
6. AMC Entertainment Holdings (AMC): American theatrical exhibition company
7. Alibaba Group Holdings Ltd. ADR (BABA): Chinese online ecommerce giant
8. Tesla Inc. (TSLA): designs, develops, manufactures, sells and lease electric vehicles and energy generation and storage systems.
9. Skills Platform Inc. (SKLZ): enables game developers to monetize their content through fun and fair multi-player competition.
10. Chemours Co (CC): provider of performance chemicals
11. Micron Technologies (MU): offers memory and storage solutions
12. Smith & Wesson Brands Inc (SWBI): manufacturer of firearms products
13. Desktop Metal Inc. (DM): manufactures and sells additive manufacturing solutions for engineers, designers, and manufacturers
14. Goodrich Petroleum Corporation (GDP): independent oil and natural gas company
15. Palantir Technologies Inc. (PLTR): builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations.

It would be interesting to see whether this ETF sees the light and whether it will be able to attract large sustainable inflows. However, the damage Meme stocks did to the market is certainly taken into consideration by the SEC, who remains reluctant to approve highly speculative instruments, as seen with the list of rejected Bitcoin ETFs applications piling up in their drawers. (Read Bitcoin ETFs: When will it hit the US market?)

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