Meme-themed, social media-driven ETFs plummet in value

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Reddit’s Wall Street Bets crowd may have once vowed to take meme stocks “to the moon,” but instead they and the exchange-traded funds that focus on them have been eclipsed by steady, boring, earthbound investing .

The particularly poor performance of social media-driven meme ETFs is partly due to the fact that popular stocks such as computer games retailer GameStop, cinema operator AMC Entertainment and electric vehicle maker Rivian have been heavily undercut.

Earlier this week, the Roundhill Meme ETF (MEI) has been linked to the VanEck Social Sentiment ETF (TO HUM) collapsed 40 percent and the SoFi Social 50 ETF (SFYF) 35 percent in the same period. The losses make the S&P 500’s nearly 14 percent decline look modest by comparison.

“These funds offer tight, highly targeted exposures that carry the potential for stomach-twisting levels of volatility, and anyone considering an allocation must be fully prepared to buckle up for the ride,” said Kenneth Lamont, Sr Fund Analyst for passive strategies at Morgen Stern.

“It’s an investment strategy that fizzled out in 2022,” said Todd Rosenbluth, head of research at ETF Trends. “A meme approach to investing is a risk-taking approach that doesn’t work [this year].”

MEME holds an equally weighted portfolio of 25 US stocks that “exhibit a combination of increased social media activity and high short interest.”

It is based on the idea that platforms like Twitter, Reddit, Discord, and StockTwits have expanded investors’ ability to consume and share research and investment ideas.

The underlying index is rebalanced every two weeks based on the number of mentions on selected social media platforms over the last 14 days.

The fact that it still owns GameStop and AMC alongside stocks like Rivian, Beyond Meat, and Robinhood shows that these stocks still rank high on the minds of many social media users.

Similarly, BUZZ makes its way to the 75 large-cap US stocks “showing the highest levels of positive investor sentiment and bullish perception based on content pulled from online sources such as social media, news articles, blog Posts and other alternative datasets were collected”. . It is recompiled monthly.

The current portfolio is a mix of big tech companies like Meta Platforms, Apple, and Amazon, and the well-known meme stocks — none of which have performed well in recent months.

SFYF targets the 50 most commonly held US stocks in self-managed broker accounts on trading and investment platform Social Finance, rebalanced monthly.

Its largest holdings are again a mix of tech and meme names, led by Apple, Tesla and Rivian, the latter not ranking among America’s 300 largest companies at 6 percent.

“An overweight to Rivian was the biggest contributor to SFYF and MEME’s plunge this year,” Lamont said, although this was far from “a single stock story.”

“These ETFs are inherently high beta, outperforming the market in bull markets and underperforming in bear markets [are] long the momentum factor,” added Lamont.

Elisabeth Kashner, FactSet’s director of global fund analysis, agreed, saying, “At the simplest level, these funds are working as designed.”

“They are designed to fit into a very narrow market niche. They’re seen as wealth-building opportunities if you find the right topic at the right time, but there’s such a thing as the wrong segment at the wrong time. . . If you play with sharp knives, sometimes you’ll cut yourself,” she added.

Rosenbluth noted that investors have been rewarded this year for more defensive equity strategies that tend to grow more slowly, dividend payers or companies in the utilities, consumer staples or energy sectors. “This [meme-themed and social media] Funds don’t typically have a lot of exposure to these sectors, so they struggle.”

There is one exception to this trend. Unlike its peers, Tuttle Capital Management’s FOMO ETF (FOMO), which aims to reflect current or emerging trends, is actively managed. And unlike them, it’s down just 18.6 percent.

His rivals’ struggles have meant the fortune – never large – has shrunk even further. BUZZ has fallen from a peak of $356 million in March 2021 to $79.7 million, SFYF from $30 million in November to $17.3 million and MEME from $2.1 million in late 2021 to just $1 million left.

With assets in free fall, Lamont suggested some might not last much longer. “If history is any guide, the low survival rates of such niche offerings don’t inspire confidence,” he said.

However, Will Hershey, co-founder and chief executive officer of Roundhill Investments, said he has no plans to shut down MEME.

“We’ve only launched the fund for six months, so we’re going to try,” Hershey said, though he admitted, “We’re losing money on the fund, there’s no way to hide from it.” He said an ETF had to “raise close to $30-$40 million to break even.”

He insisted MEME still served a purpose as a “short-term speculative trading vehicle.”

“In many ways, it’s intended to be more of a trading vehicle than a long-term buy-and-hold.” There are periods in the market when companies that are being talked about on social media and have very high short-term interest do very well. People can capture those euphoria periods and go long or short them,” he added.

For her part, Kashner despised the stratospheric yield-hunting common to moonshot funds.

“We have long known that there is a significant need for financial literacy, certainly in the US but also more broadly,” she said. “Investors without a financial background are more likely to be won over by messages about potential upside.”

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