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AMC and GameStop May Soon Feature in a Meme Stock ETF

By Rhian Hunt – Sep 4, 2021 at 11:15AM

Key Points

  • Roundhill has seen some of its ETFs succeed more than others.
  • It has warned that meme stocks are prone to high volatility.

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The exchange-traded fund will use scans of social media to pick stocks.

Even as meme stocks GameStop (GME 2.38%) and AMC Entertainment (AMC -2.69%) trade near one-month highs, they may soon be included in a new meme stock-exchange-traded fund (ETF), the Roundhill Meme ETF. Is the fund worth considering? Let's take a closer look.

ETFs let individuals invest in a bundle of stocks by trading shares in the ETF instead, providing easy diversification. Most ETFs center on stocks with a traditional investing theme. Examples include the S&P 500 or a specific market sector, such as information technology. This new meme ETF, however, will attempt to create an index of stocks that are favorites among retail investors in social media.

This is the latest of Roundhill's targeted ETFs

Roundhill Investments, the firm filing with the U.S. Securities and Exchange Commission (SEC) to launch the ETF, already operates six others. The company says its ETFs provide "targeted, pure-play exposure to the investment themes of the future." Some examples include the Roundhill Bitkraft Esports & Digital Entertainment ETF (NERD 2.32%), which focuses on video-gaming "esports" and the teams playing them; the Roundhill Sports Betting & iGaming ETF (BETZ 2.65%), which includes companies that provide physical and online betting services; and the Roundhill Streaming Services and Technology ETF (SUBZ), featuring companies with streaming services.

Plastic cubes spelling out ETF in blue lettering on top of stacks of coins.

Image source: Getty Images.

Several of Roundhill's ETFs have seen notable gains, such as the Roundhill Acquirers Deep Value ETF (DEEP -0.17%) -- up more than 53% in the past year. Another winner is BETZ, which tapped into the sports-betting boom spearheaded by companies like DraftKings and has risen nearly 60% during the past 12 months. Others are less successful. NERD is up about 10% over the past year but lost some 17% during the most recent six months, and SUBZ has fallen over 30% from the peak just after its February IPO.

Roundhill's new ETF will trade on the New York Stock Exchange under the ticker MEME if its launch is successful. The registration filing says MEME "seeks to track the performance, before fees and expenses, of the Solactive Roundhill Meme Stock Index." The ETF's annual management fee will be 0.69%.

The index will choose stocks from social media

Meme stocks like AMC Entertainment will find there way into the Solactive Roundhill Meme Stock Index -- and thus into the ETF -- through a series of selection processes as follows:

  • A stock will first need to meet certain daily trading volume and market capitalization benchmarks.

  • Then a tracker will scan a set of social media sites for the number of "mentions" each company has had over the prior two weeks -- thereby generating a "social media activity score."

  • The top 50 social media scorers will then be sorted according to short interest as a percentage of float, with the top 25 by short interest becoming the meme index.

  • The index will be updated every two weeks, rebalancing to replace any stocks which drop below the necessary popularity threshold with new stocks meeting its qualifications. 

The idea is certainly an unusual one, but its success seems uncertain at this point. On the one hand, being in the index and traded by the ETF could help stabilize the price gains of some meme stocks. However, meme stocks tend to be extremely volatile, and since some of them have weak fundamentals, they may well have a bias toward the downside.

Investors seeking value-oriented ETFs may want to look elsewhere -- or at least wait a few months after launch to see how this one performs.

Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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