The XRT ETF May Be The Less-Risky Way to Own GameStop

Roaring Kitty may not be so lucky to have nine lives. 

This week, the blogger whose real name is Keith Gill, started on life number two. The face and voice of the 2021 meme stock obsession, which snared inexperienced investors in a craze that ultimately taught lessons about how not to manage money, returned via a short set of posts. 

Many in the investing community wish they had similar clout. In the case of Mr. Kitty, er, Mr. Gill, he’s just doing what he did before, making a case for what he thinks are deeply undervalued stocks. Or, at least stocks that are overdone on the short side in his opinion.  

But for reasons that even the movie “Dumb Money”—which tells the story of the first go-round with GameStop Inc., AMC Entertainment and others—can’t fully explain, just a hint of upside potential in these types of stocks can produce quick price moves of highly uncommon magnitude. And that’s where many people turn what they consider “investing” into pure, unadulterated speculation. 

And so, here we are again.

Deep ETF Value?

My very favorite expression is to control what you can, and don’t stress about what you can’t. As investors who are trained to look at fundamental factors like earnings and revenue—you know, Warren Buffet types of stuff— meme stocks don’t hit the radar. Not under any reasonable projections of future growth can a move from $11 to $65 and then to $33 (as of this writing) be rationalized. 

Still, every investor is ultimately on their own. For those who consider themselves investors, and act like it, well, there’s an ETF for that. In other words, if you want to do the equivalent of walking through the casino, stopping for a minute and saying to yourself, “I’ll just do one spin of the roulette wheel, then keep walking” then funds like the SPDR S&P Retail ETF (XRT) might be a “happy medium.” Think of it as Goldilocks-style investing: not too hot and not too cold.

(Use the etf.com stock finder tool to see the ETFs holding GameStop or any other stock.)

XRT is one of several ETFs that target the retail sector in whole or part, via traditional brick-and-mortar, online upstarts, or both. But what may be particularly relevant to GameStop voyeurs is the fact the 80-stock portfolio contained inside this $750 million ETF is equally weighted. And it contains GameStop stock. So, since at each rebalancing date, XRT resets each stock to about a 1.25% weighting in portfolio.  

That means that what happens between rebalancing dates is all about the relative returns of those 80 stocks versus each other. So, if GameStop, Amazon or any other component flies higher or crashes lower, there is an impact, but not a devastating one. And when the retail sector rallies more completely, XRT gains commensurate with that.

GameStop: Rally and Retreat

Case in point: Monday and Tuesday, when GameStop’s latest parabolic move took its weighting in XRT from around 1.5% to 2.9%. That’s quite a move in two days, and given the stock’s return to earth on Wednesday, that weighting will drop back down. Compare that to a more focused ETF that might have held, say a 10% position in GameStop. That high a weighting can be too much excitement for many.  

Indeed, this type of scenario can play out over longer time frames. For instance, a glance at XRT’s top contributors to its return the past 12 months include a stock that gained more than 1,000% over that time, another that rose more than 400%, and a handful of others that raced north by 70%. When even a few stocks run like a mall crowd at 6:00 AM on Black Friday, an otherwise even-handed ETF can provide some spark. Naturally, the reverse is true as well, but again, not the same degree as a concentrated ETF whose top holdings dive on earnings or other news.

XRT is a good example of how ETF investing can be different things to different people. The way investing should be. Or, to put it another way, every investor should determine for themselves how loudly they wish to roar.