Meme Stocks May Hit Headwinds as Investors Shun Risk

Single-stock ETFs are betting against meme companies.

Market uncertainty has investors flocking to safer equity options, which may spell trouble for meme-stock fanatics, and yield high results for naysayers.  

A slew of filings this week from investing firm REX Shares indicated that it’s planning 10 single-stock funds that will bet on meme stocks declining, essentially shorting stocks such as Robinhood Markets Inc. and GameStop Corp., which led the meme trading bonanza last year.  

As market volatility persists amid recession fears, the war in Eastern Europe, inflation and rising interest rates, analysts predict these funds may gain momentum as investors flee risk and seek profitable investments. The VIX index of volatility has jumped in recent weeks after cooling off for much of the summer. 

“We came off the last year where capital was very inexpensive and very easy to get, and people were investing in things that were just great ideas but weren't necessarily profitable,” said Stephen Lee, founding principal at Logan Capital Management. “But if you get to a slightly slowing economy, a slightly higher cost of capital in a more restrictive environment, then companies that are great ideas that possibly form businesses are going to go down.” 

“The single-stock ETFs, meme-stocks stocks, those will feel it more,” he said, adding that investors are in search of companies that are both innovative and profitable.  

The meme-stock phenomenon, fueled by chatter in online communities like Reddit and Twitter, has settled down after a bump in July and Augusth. Companies like Bed Bath & Beyond Inc. and GameStop Corp. were down nearly 6% and 1%, respectively, in the middle of the trading day Friday in New York.  

Meme-based ETFs have been consistent losers. The Roundhill Meme ETF (MEME), which holds a number of meme-stock related names, has declined 60% since it began trading Dec. 8. The VanEck Social Media Sentiment ETF (BUZZ) is has retreated 39.1% so far this year. Both funds underperformed compared with the S&P this year, which is down 18% year to date.  

Last month, Bloomberg reported a meme-stock-related short squeeze as investors lost $1.6 billion in August after betting against companies like Bed Bath & Beyond Inc. and GameStop Corp. The loss followed similar trades in early 2021, when large hedge funds bet against GameStop.

Contact Shubham Saharan at [email protected]