With contributions from the Man FRM Investment Risk team. Certain indices/measures mentioned on this page have been provided for information purposes only. They are intended to provide a comparative indication of particular asset classes, investment sectors, or financial markets more widely (‘market backdrop’). The organisations and/or financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.
Retail investing sure doesn’t act the way it used to. Retail used to mean lots of small, relatively slow-to-act, disorganised, not-so-savvy market participants. However, with Reddit, social media and meme-investing, retail investing has a much riskier feel in a world of short squeezes, in-app options trading and rocket emojis. January 2021 and the Gamestop saga is still much-too-fresh in investor’s minds. Since then, institutional and retail investors alike have been wondering: what’s the next Gamestop? Where will the coordinated retail traders focus their aim next?
Source: Reddit, Man Group. Date range: 4 March to 2 July 2021.
The organisations and/or financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.
Unfortunately, we believe there is no single model 'retail portfolio' investors can use to benchmark this analysis. However, through natural language processing and other machine learning techniques, investors can take a broad temperature gauge of which names are attracting the most attention from the retail crowd and have the highest potential to be the next meme stock.
One example for this method in action is BUZZ, the VanEck Vectors Social Sentiment ETF. This fund looks to track the performance of US stocks that exhibit the most positive sentiments from social media, news sources and other alternative datasets. The ETF, which is rebalanced monthly, tracks the performance of 75 US stocks which have a market cap of more than USD1 billion and 3-month average daily volume of more than USD1 million.
Given this inclusion criteria, it should not be too much of a surprise to find that there’s a considerable overlap between BUZZ and other major US indices such as the S&P 500 index and the Nasdaq 100 index.
Source: Man Group, Bloomberg; 17 June 2021.
Yolo
Despite having more than 50% of its names also included in the S&P 500, BUZZ is remarkably less diversified. Given that meme stocks are often born from newsworthy technological advancements (Virgin Galactic), outsized personalities (Tesla) or even nostalgia (Gamestop), BUZZ is accordingly weighted much more heavily towards the information technology and consumer discretionary industries.
When we compare this to the broader S&P 500 index, this bias for consumer discretionary names becomes even more apparent, with the sector being double the weight in BUZZ. Conversely, BUZZ has no exposure to sectors such as utilities or real estate.
Source: Man Group, Bloomberg; 17 June 2021.
Volatility to the Moon
The concentration of names in the index and the very nature of meme-stock investing means that these names are exceptionally vulnerable to periods of high volatility. BUZZ has around double the average single name annualised volatility, compared with the Nasdaq 100 and the S&P 500.
Source: Man Group, Bloomberg; 17 June 2021.
This high average volatility number is not simply the result of a single outlier (GameStop). When we add the figures for every name in each index, there are only a handful of stocks in the S&P 500 and Nasdaq 100 which are more volatile than even the average BUZZ constituent.
Source: Man Group, Bloomberg; 17 June 2021.
HODL, HODL, Toil and Trouble
We believe even the extreme volatility seen above is a particular maxim of the engaged retail trading community. But this is a clear example of survivorship bias at work. We believe people are more inclined to listen to those investors who realised unusually high gains despite the volatility and less so to the many others who held names which performed as expected or whose value fell. The issue for retail investors and these stocks in the BUZZ index is that it can result in large deviations in expected returns.
Source: Man Group, Bloomberg; 17 June 2021.
While the more optimistic retail traders might hope that the major upside tail risks more than make up for the downside ones, the cumulative returns since BUZZ’s inception unfortunately show them wrong.
Source: Man Group, Bloomberg; 17 June 2021.
Conclusion
ETFs that want to ride the Reddit-trading revolution appear in our view to be more concentrated, more volatile and less beneficial than traditional stock indices. However, we believe they could be useful for investors in one way: by acting as a crowding measure and as a risk mitigation factor against retail day traders.
Certain indices/measures mentioned on this page have been provided for information purposes only. They are intended to provide a comparative indication of particular asset classes, investment sectors, or financial markets more widely (‘market backdrop’). The organisations and/or financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.
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