Last month, I brought you the infamous Inverse Cramer ETF, a theoretical actively managed portfolio that tracked the inverse performance of Cramer buys and sells. Before that, we brought you BECKY ETF, a hypothetical fund tracking the stocks of 10 companies loved by upper-middle-class American white girls.

Naturally, we had to go further. In our quest to find the most outlandish, speculative, and borderline ridiculous investments out there, we came up with an idea for an ETF that would top both. And where better to start than the current meme stock craze? Thus, the idea for the Meme Stock ETF was born. 

What is a meme stock?

A meme stock can be defined as a stock that gains viral popularity among retail investors through social media. We commonly see these arise from discussions in Reddit communities, TikTok videos, or YouTube channels that endorse certain stocks. 

Why do some stocks become meme stocks? I’m honestly not sure. Some people will claim fundamentals. Others will claim momentum. Some will say it’s a conspiracy by Wall Street to manipulate prices and short companies into oblivion. Many will simply declare, “I like the stock.”

The craze began with the January 2021 GameStop (GME) short squeeze that sent the prices of other beaten-down, heavily shorted stocks like AMC Entertainment (AMC), Bed Bath & Beyond (BBBY), Nokia (NOK) and BlackBerry (BB) soaring. 

Colourful characters like the entire r/WallStreetBets community, self-proclaimed “Apes,” and now legendary investor Keith “DeepF*ckingValue” Gill rallied behind their chosen meme stocks to earn obscene fortunes (or, more often, book large capital losses). 

Since then, the craze has continued in peaks and valleys. Many of these stocks continue to possess high volatility and swing 10% or more unpredictably intra-day. Numerous other communities have sprung up to support their chosen stocks, like r/Superstonk for GME investors. 

Movements like the “direct registration” (DRS) campaign for GME have begun responding to perceived Wall Street corruption. Activist shareholders like Ryan Cohen and Elon have continually whipped fans into a frenzy over their social media activity. 

Is a Meme Stock ETF possible?

I’m going to say yes. It would be quite easy, actually – an equal-weighted portfolio of the most mentioned tickers on social media, reconstituted and rebalanced quarterly. Slap a 0.75% management expense ratio on it, and you have a lucrative and popular ETF. Bonus points if you put the r/WallStreetBets logo on the cover page of the SEC prospectus for laughs. 

Index One once again provided us with a custom-built index (I’ll call it “MEME”) of five tickers mentioned most on Reddit. Currently, MEME includes BB, NOK, BBBY, AMC, and of course, GME. Each stock is equally weighted and uncapped as to take full advantage of the momentum. 

The current results are…poor. MEME is down -30% YTD, with an incredibly high volatility of 57% and a Sharpe ratio of -0.53. An investor in this fund would have earned substantially poorer returns than even a leveraged index fund. A high-interest rate and inflationary environment tend to wreak havoc on speculative investments. 

Volatility remains high, which still gives the ETF some utility. If MEME had an options chain, the premiums received from selling covered calls would be extremely juicy. A swing trader may also elect to use MEME as a high-beta instrument to trade around earnings reports or technical indicators with. 

Why isn’t a Meme Stock ETF a good idea?

Yes, a Meme Stock ETF is certainly possible. That doesn’t mean its prudent – it’s actually a very foolish investment strategy. If you want excitement, go to the casino, and bet your 401k on red. 

Yes, many of the stocks held in MEME had eye-popping returns. Some of them might even repeat this as volatility and investor interest remains high. Heck, r/Superstonk is still banking on a “mother of all short squeezes” (MOASS) for GME, where they expect the price to hit a floor or $1 million or more per share (I’m not joking, look it up, they really think this will come true). 

Every time I see this sort of speculative mania, I’m reminded of this quote from the late John “Jack” Bogle, father of the first index fund, founder and former Chairman of the Vanguard Group, and author of The Little Book of Common Sense Investing:

“Buying funds based purely on their past performance is one of the stupidest things an investor can do.” 

For most investors, the biggest boon to their portfolio returns comes from keeping expense ratios low, selecting a globally diversified portfolio of index ETFs, maximizing contributions, and staying the course when market turmoil strikes. 

The sooner retail accepts this fact, the sooner they can get to making real, long-lasting returns and not be left holding the bag once the meme rocket inevitably crashes back down on its attempt to reach the moon. 

Article author: Tony Dong

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.