GameStop Throws 2 ETFs For A Loop

It’s not often that a single stock can drive an ETF. Sure, it happens sometimes. Amazon famously makes up 22% of the Consumer Discretionary Select Sector SPDR Fund (XLY), a consequence of the company’s consistent growth into a $1.6 trillion behemoth that dominates e-commerce and cloud computing.

Then you have the broader FAAMG cohort—Facebook, Apple, Amazon, Microsoft and Google-parent Alphabet—which makes up anywhere from 3.4% (in the case of Alphabet) to 7.2% (in the case of Apple) of the various S&P 500 funds.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Each of those stocks account for an even bigger share of more targeted ETFs. For example, the ETF.com stock screener shows Apple with a whopping 23.7% position in the Technology Select Sector SPDR Fund (XLK) and Facebook with a 21.2% weighting in the Communication Services Select Sector SPDR Fund (XLC).

But each of those stocks came to dominate their respective ETFs over many, many years. These aren’t fly-by-night companies that went from zero to 100 overnight.

You can probably see where I’m going with this.

GameStop Phenomenon
GameStop is all the financial media, and quite frankly, the entire media seems to be talking about it this week. Almost everyone is aware of the story by now. Enormous amounts of buying by a group of Redditors on WallStreetBets ignited one of the most epic rallies ever seen. A hedge-fund-driven short squeeze, an options-driven gamma squeeze and just the momentum of thousands of others piling into the stock as it became a meme, added fuel to the fire.

GameStop shares rose from $18.84 at the start of the year to a high of $483 this morning. It’s currently down to $277, but who knows where it will be by the time this piece is published.

The point is that the stock is up a lot; in a very short time period (it’s up 173x from last April’s $2.80 low to today’s high).

GameStop Stock Price

Rare Impact
Normally one stock moving up or down isn’t going to have a much of an impact on a diversified ETF. That’s the whole point of buying a basket of stocks after all—diversification, reducing single-stock risk.

Even one of the aforementioned ETFs with a heavy weighting in Apple or Amazon probably isn’t going to be whipsawed by one of those stocks in any given month. Maybe over longer time periods, they’ll have more of an impact, but in just four weeks, probably not. They just don’t move that much.

With GameStop, it’s a different story. A 10-20x move in such a short time frame has absolutely had an impact on the ETFs holding the stock. Consider the Wedbush ETFMG Video Game Tech ETF (GAMR), the fund that has the enviable (or problematic, depending how you look at it) position of being the ETF with the largest weighting in GameStop.

GameStop’s weighting in GAMR earlier this morning (when the stock was around $350) was as much as 27%, up from 2.1% at the start of the year. Right now, it’s somewhat less than that. By the end of the day, it could be completely different.

In any case, this one stock has been an absolutely massive driver of GAMR, a video game ETF with 93 holdings. For a single stock in GAMR to have such an outsized impact on the ETF is not what many investors would have expected.

GAMR Top 10 Holdings

Normal Expectations Shattered
For most of the year, the outsized impact has been beneficial to investors. At today’s high, GAMR was up 53% in just the first four weeks of 2021. On the other hand, anyone who bought near today’s highs is dealing with a completely different set of circumstances. They have an ETF with more than a quarter of its value in GameStop.

If they’re short-term traders, maybe that’s what they want (though if they wanted GameStop exposure so badly, they could’ve just gone out and bought the stock itself). However, for longer-term investors, GAMR has become something that’s incredibly risky for new entrants, something that falls outside of the normal expectations of diversification that investors take for granted with ETFs.

They might expect a 20%+ position in Amazon in one of their ETFs, but not a similar sized position in GameStop, a company that went from a $1 billion market cap to a $33 billion market cap in a month.

Not So Equal-Weighted
A similar situation is playing out with the SPDR S&P Retail ETF (XRT), another fund with a double-digit percentage position in GameStop. What’s most interesting about XRT is that it’s an equal-weighted fund, and an equal-weighted fund is the last place you would expect a single stock to be driving crazy moves.

Every stock in an equal-weighted ETF is supposed to have more or less the same weighting; hence, equal-weighted. At the start of the year, that was indeed the case. GameStop was a 1.5% position in XRT, more or less in line with all of the other stocks in the portfolio.

But here again, GameStop’s 10x+ move completely changed the makeup of the ETF. As of yesterday’s close, the stock had become a 20% position in XRT. Yes, a single stock had a 20% position in an equal-weighted fund. That’s definitely not normal.

XRT Top 10 Holdings

Incidentally, the craziness with XRT doesn’t stop there. As Bloomberg’s Eric Balchunas tweeted, far from attracting new money into the fund, XRT’s GameStop exposure has led to outflows as investors redeemed XRT units for coveted GameStop stock.

Currently, XRT has $237 million in assets under management, down from $744 million on Tuesday. The aforementioned GAMR, I should point out, hasn’t had any such outflows yet. Its AUM currently stands at $223 million, up from $150 million at the start of the year. 

YTD Returns For GME, GAMR, XRT

Where To From Here?
All in all, it’s been a mixed bag for these ETFs holding GameStop. Performance has been good for those fortunate enough to get in on the ground floor, but the super-spike in that stock has caused the makeup of their portfolios to be completely lopsided, turning off any would-be investors at these levels.

For that to change, either the GameStop bubble has to burst, bringing down the company’s weighting in the portfolios naturally, or the ETFs have to rebalance.

For XRT, the next rebalancing is scheduled for March 19, after which GameStop should be adjusted back to a 1-2% weighting in the fund. Similarly, GAMR is scheduled to be rebalanced in March as well, after which its three-bucket equal-weighting scheme should bring GameStop’s exposure in the fund down to less than 2%.

Could the funds rebalance earlier than March given the extenuating circumstances? It’s not unheard of for that to happen. Most recently, the major index providers moved around key rebalancing dates last year in response to the coronavirus pandemic.

How Far Can Manias Run?
In fact, it’d probably be a win for investors in these ETFs if they were to sell GameStop while it’s high and plow the proceeds into their other holdings that haven’t rallied nearly as much. But then again, that gets you into active management territory, which isn’t really the purview of these index-tracking funds.

And besides, maybe GameStop will be $1,000 or even higher come March. It’s not likely, but neither was GameStop at $483 in January. No one knows how far and how long these manias can run.

For most ETF investors, this is all just an amusing sideshow, but for investors in a few funds, they’ve inadvertently become a part of the game.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2