The Rise of a Meme-Themed Exchange-Traded Fund

The Roundhill MEME ETF (ticker: MEME) has been making waves in the market, but contrary to popular belief, it is not solely focused on Gamestop or AMC Entertainment – two well-known "meme stocks" that have gained significant attention recently.

This month, the MEME ETF has seen a 12.3% increase, outperforming the S&P 500's 7.5% gain and the Nasdaq Composite Index's 9.2% return. However, a closer look at its composition reveals that it includes stocks that go beyond the traditional meme concept. Companies such as Tesla (TSLA), Palantir Technologies (PLTR), and Palo Alto Networks (PANW) are part of its diverse portfolio.

Interestingly, AMC and Gamestop, which are considered classic meme stocks, have actually experienced declines this month. This suggests that the ETF's recent success can be attributed more to tech-related enthusiasm and a resurgence of market optimism rather than a revival of meme-driven mania.

According to Jessica Rabe, co-founder of DataTrek Research, clearly defining what exactly constitutes a meme stock is challenging. She states, "The whole notion of a meme stock is difficult to define precisely. They came and went with the speculative tech bubble in 2021."

Although the MEME ETF has achieved a 29.6% gain this year, it falls short compared to the tech-heavy Nasdaq Composite, which has risen by 36.3%.

The term "meme stock" gained prominence in early 2021 when highly shorted stocks like Gamestop and AMC experienced significant surges as retail traders leveraged social media platforms like Reddit and X (formerly known as Twitter) to drive up prices. Short sellers were caught off guard, leading to a frenzy of buying and selling that resulted in substantial profits for astute traders.

Roundhill, the sponsor of the fund, describes the MEME ETF as the "first and only ETF explicitly designed to track the performance of meme stocks." It tracks an index of 25 equally weighted stocks that display a combination of elevated social media activity and high short interest. To maintain an equal-weight distribution, Roundhill rebalances the portfolio every two weeks.

While some of the ETF's holdings may not fit the stereotypical meme-y image, such as Palo Alto Networks, Tesla, Palantir, and Datadog (DDOG), these companies boast strong fundamentals and have been enjoying significant gains amidst the tech rally. In contrast, AMC has seen a decline of over 20% and Gamestop is down 4% this month.

The Decline of Meme Stocks: Is the Trend Losing Momentum?

Introduction

Changing Landscape of Meme Stocks

As of last Tuesday, only four out of the 25 holdings in the Roundhill MEME ETF were among the most-mentioned tickers on Wallstreetbets, the Reddit forum that initially fueled the meme frenzy. These stocks include Tesla, Palantir, AMC, and Rivian Automotive (RIVN). The fact that the majority of the ETF's holdings are no longer in the spotlight suggests that the meme trend is losing steam.

The Roundhill MEME ETF was launched in December 2021, at a time when the meme frenzy was starting to wane. Since its inception, the ETF has experienced a significant decline of 54.6%, while the Nasdaq Composite Index dropped by only 7.2%. Additionally, it has struggled to attract investors, with just $2.7 million in assets.

Retail Trading and Stimulus Cash

One of the primary reasons for the waning interest in meme stocks is the sharp decrease in retail trading levels compared to 2021. During the pandemic, traders had ample time on their hands and were flushed with stimulus cash, which led to increased participation in meme trading. However, as the effects of the pandemic have subsided, so has the trading fervor. For instance, Robinhood Markets (HOOD), one of the most popular platforms for meme traders, saw a substantial 36% drop in equity trading volume over the two-year period ending in October 2023.

GameStop and AMC: Fading Stars

GameStop and AMC, once the shining stars of the meme stock world, have also lost their appeal. GameStop shares have plummeted by 33.4% this year, while AMC's fate has been even worse with an alarming 80.5% drop. AMC's announcement of plans to sell up to $350 million of stock to pay off debts triggered a 30% decline this month alone.

Crypto and the Meme ETF

Amidst the declining meme stock landscape, there is a glimmer of hope for the Roundhill MEME ETF. The fund holds crypto-related companies such as Coinbase Global (COIN), Marathon Digital Holdings (MARA), and Riot Platforms (RIOT). These stocks have seen substantial gains of over 190% this year alongside Bitcoin's rally.

The Future of Meme Stocks

While animal spirits may be reawakening in the market, it remains to be seen whether meme stocks will regain their former glory. The decline in retail trading levels, combined with the struggles of the Roundhill MEME ETF and the underperformance of once-prominent meme stocks like GameStop and AMC, suggest that the trend may have lost its momentum. It will likely take more than just renewed market enthusiasm to breathe life back into meme stocks.