Are you intrigued by the “meme” stock phenomenon but think it’s too hot (or crazy) to handle? Even if you do, the trend isn’t likely going away anytime soon, and people are making money from it.
In that spirit, Direxion today debuted an exchange-traded fund designed to let people profit by investing in those companies that, because they trade at very low prices, have a chance to become meme stocks.
The Direxion Low Priced Stock ETF (LOPX) tracks the Solactive Two Bucks Index, an equal-weighted index that measures the performance of about 50 U.S.-listed securities that trade at between $2 and $5 when they go into the portfolio. Stocks that trade at $5 per share or less are considered to be penny stocks.
The fund’s investment premise is that stocks trading at these low levels are harder to trade because they’re less liquid. But they’re easier—and presumably less risky—to trade when they’re packaged together into an ETF, and investors in this first-of-its-kind Direxion fund could benefit if share prices of some of the portfolio holdings zoom from their low levels.
The fund avoids “pink sheet” securities that trade on over-the-counter exchanges, and instead invests only in companies listed on one of the major U.S. exchanges.
“What I find most intriguing about these stocks is they’ve been ignored by Wall Street,” said David Mazza, managing director and head of product at Direxion. “Many investment banks have cut coverage of companies, and [penny stocks] on average have seen their coverage go down while the number of analysts covering the likes of Apple, Amazon and Facebook has gone up.”
He noted this creates possibly exploitable market inefficiencies. “If you want to put your portfolio outside of traditional indices, penny stocks are where you might find the best opportunities in today’s market because they are so under-covered,” Mazza said.
The Direxion Low Priced Stock ETF’s portfolio contains some familiar names whose stocks recently traded in the low-single-digit range. Those include Genworth Financial Inc., Patterson-UTI Energy Inc., Pitney Bowes Inc. and Transocean Ltd. Some of the fund holdings have appreciated in price since joining the index and currently trade at more than $5.
Index components must trade between $1.25 and $10 per share when the index rebalances in February, May and November. The August rebalancing is when the index is reconstituted, and new names are added if they trade for $5 or less and meet other requirements that include having a market capitalization of at least $85 million. They also aren’t allowed to do reverse stock splits between index rebalancings.
Meme Stocks
That brings us to the connection with so-called meme stocks, a small group of companies that earlier this year traded at low prices and were heavily shorted by hedge funds. A sizable number of retail investors banded together on the social media website Reddit and hatched a plan to invest in a select number of these stocks in order to create a short squeeze aimed at boosting the share price of those targeted equities. Many of the participants who traded these stocks used images embedded with text, or memes, and companies caught up in the frenzy are called meme stocks.