- Roundhill's MEME ETF uses a metric based on social media relevance and short interest to determine the meme stocks of the moment.
- Thanks to the markets having a less pessimistic outlook for 2023, some speculative assets have started to recover from their steep 2022 declines.
- Some stocks like MicroStrategy, Coinbase, AMC Entertainment, and Peloton have seen exciting rallies in the first few weeks of this year.
How Are Stocks Chosen for the Meme ETF?
The phenomenon of meme stocks is relatively new to the markets. It started back in 2021 when retail investors piled into shares of GameStop (GME) - Get Free Report in an attempt to punish short sellers.
Ever since, other stocks, including AMC Entertainment (AMC) - Get Free Report and Bed Bath & Beyond (BBBY) - Get Free Report have become major meme stocks and continue to trade in unusual ways, compared to other "regular" stocks.
Here's how the ETF's selection process works:
- 50 stocks with a minimum market cap of $1 billion are selected due to their "social media activity scores." This score is based on the frequency of a stock's mentions on social media platforms such as Twitter, Reddit (r/WallStreetBets), Discord, and Stocktwits.
- The 50 stocks are then ranked according to their amount of short interest. Those with the most intense short activity rank the highest. From these, 25 names are filtered out.
- Finally, the ETF continuously monitors the markets to capture the hottest trends among meme stocks, and the list is updated every two weeks.
See below for a list of the ETF's main holdings as of the latest update:
Meme Stocks Are Off to a Great Start
Since the start of 2023, the performance of the Meme ETF has been exciting. It's already up nearly 15% in just over two weeks.
The main reason behind the great start to the year is due to expectations of a less worrisome macroeconomic scenario for stocks in general. Hopes for a soft landing of the global economy were reinforced earlier this year when inflation peaked.
This provides some relief for assets most impacted by a high-interest-rate scenario — especially growth and speculative stocks.
Here are four stocks included in the last ETF update that have been the top gainers this year so far:
- MicroStrategy (MSTR) - Get Free Report is an analytics and software business whose primary business strategy is to acquire and hold Bitcoin (~BTCUSD) . Therefore, the company tends to trade correlated to the cryptocurrency's movements. This year alone, shares have jumped 52% in line with Bitcoin's nearly 30% jump in the same period.
- Cryptocurrency exchange Coinbase (COIN) - Get Free Report is another company highly sensitive to crypto market movements. Over the past year, due to the crypto winter and uncertainty in the crypto market, short activity in Coinbase has reached 26% of its float. The brief recovery in cryptos earlier this year has caused shares to jump over 47%.
- One of the classic meme stocks, AMC Entertainment (AMC) - Get Free Report has been engaging in a rally of nearly 40% this year in line with similar moves by other meme stocks such as Bed Bath & Beyond — which missed the list due to its market cap — and GameStop. Retail investor sentiment on the rise, along with skyrocketing borrow fees, has been the main recipe for the video game retailer's incredible performance in the first weeks of the year.
- The exercise equipment company Peloton (PTON) - Get Free Report is another stock that has great popular appeal among retail investors — especially after having its stock soar more than 600% during the pandemic, motivated by stay-at-home trends. Today, with about 15% of its float shorted, the company remains volatile and susceptible to bullish broad market movements.
Meme Stocks Aren't Dead Yet
It is customary for media outlets to report that certain speculative assets are dead after a bullish trend is over.
Bitcoin is a case in point. Several times in recent years it has been declared "killed." But even though it has fallen by a whopping 70% from its 2021 peak, the cryptocurrency is still trading at $20,000 per coin — a price many would have thought ludicrous a decade ago.
However, it is worth noting that assets like meme stocks and cryptocurrencies have just faced a bear market for the first time in their history. In periods of bearishness in the markets, it is natural for investors to take a more cautious stance by staying away from speculation-driven assets.
The recent rallies of meme stocks and other stocks with similar profiles show that socially mobilized investing, even though bruised by last year's losses, is still alive.
Even if the U.S. officially enters a recession, the performance of speculative stocks should probably not get more difficult for retail investors than what occurred throughout 2022.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)