Two market trends appear to be converging as one of the hottest corners of the stock market (i.e. meme stocks) will soon be linked with one of Wall Street’s latest innovations—single-stock ETFs.
The meme stock niche is relatively new, and might best be described as stocks that see a sharp bump in volume due to their popularity on social media. Last month, several of the most prominent meme stocks experienced a surge in volatility, alongside some dramatic swings in their underlying shares.
Exhibit A is Bed Bath & Beyond (BBBY) which at one point was up almost 300% during the month of August. Shares have since retraced significantly, but BBBY shares are still up about 50% in the last 30 days.
Another well-known meme stock—AMC Entertainment (AMC)—was also on fire earlier this month, having jumped from $15.37/share on Aug. 1 all the way to $24.81 on Aug. 16. However, shares in AMC faltered during the second half of August, dipping back down to $8.58, where they are trading today.
AMC is a special case, however, because the company recently issued preferred shares to existing shareholders via a dividend. Those shares commenced trading on Aug. 22 and are listed under the ticker AMC Entertainment Holding Preferred Equity Units (APE). APE shares were trading for $4.59/share as of Sept. 2.
Although the APE corporate action was couched as a dividend, it walks and talks a lot more like a 2-for-1 stock split. For this reason, the recent sell-off in AMC shares has been viewed as an adjustment to the regular AMC shares based on the newly created APE preferred units.
Due to the APE dividend, the true enterprise value of AMC is now best represented by the combination of AMC and APE. At present, that means AMC is worth roughly $8.8 billion, with a combined stock price of $13.17/share ($8.58/share + $4.59/share = $13.17).
Notably, trading in the original meme stock, GameStop (GME), wasn’t as active in the first half of August. But GME has also declined in value during the last couple of weeks, perhaps in sympathy with the broader meme group. Overall, shares in GME are down roughly 23% in the last 30 days.
Aside from the dramatic swings observed in their underlying shares, meme stocks are in the news because investors and traders will soon be able to access exposure to these companies via single-stock ETFs.
Single-stock ETFs are one of the latest innovations to hit Wall Street, and as the name implies, these are exchange-traded funds that focus only on a single stock. This is somewhat counterintuitive, because traditionally ETFs are built using a basket of stocks, and are designed to track the returns of a stock index, or an investment theme (i.e. artificial intelligence, space exploration, etc.).
Single-stock ETFs, on the other hand, are now being created so that leveraged and inverse trading can be made available on single stocks, as seen in the leveraged and inverse niche of the existing ETF market.
Previously, leveraged and inverse ETFs have been offered with names like “2x bull” or “2x bear”—like the Direxion Daily CSI China Internet Index Bull 2x Shares (CWEB), or the Daily Energy Bear 2X Shares (ERY).
The new ETFs are similar to these examples, but instead offer that type of exposure on a single stock. Investors and traders can therefore now access products that offer amplified and inverse returns on the daily performance of individual stocks. Whether there’s demand for such products, is another question altogether.
It’s important to note that investors and traders engaging with single-stock ETFs will need to manage a new dimension of risk, as leveraged and inverse products don’t act the same as traditional stocks and ETFs. The stated amount of leverage or inverse exposure in most of these products is reset daily, meaning they are essentially short-term vehicles that are not intended to be held over long periods.
As a result, investors and traders that choose to utilize single-stock ETFs will likely do so in order to express short-term bullish or bearish opinions. One example might be to speculate or hedge on an upcoming earnings announcement, or some other single-stock event that’s perceived as binary.
Currently, the single-stock ETF universe is fairly limited, with only a handful of offerings available in the market. AXS currently offers single-stock ETFs on Nike (NKE), Nvidia (NVDA), Pfizer (PFE), PayPal (PYPL) and Tesla (TSLA).
But REX Shares has now filed with regulators and indicated its intent to offer single-stock ETFs on a group that includes some of the best-known meme stocks. Initially, it has proposed to start with inverse single-stock ETFs, which means these ETFs are intended to provide investors inverse exposure to daily price moves.
Mechanically, that means these ETFs trade higher when the underlying stock they track trades lower.
Based on a recent filing, the initial REX Shares lineup is expected to include: AMC Entertainment (AMC), Beyond Meat (BYND), Coinbase Global (COIN), GameStop (GME), MicroStrategy Incorporated (MSTR), Nikola Corporation (NKLA), Peloton Interactive (PTON), PENN Entertainment (PENN), Robinhood Markets (HOOD) and Tilray Brands (TLRY).
Although the tickers are not yet available on these ETFs, the following ten names have been filed with regulators:
- REX Short AMC ETF
- REX Short BYND ETF
- REX Short COIN ETF
- REX Short GME ETF
- REX Short MSTR ETF
- REX Short NKLA ETF
- REX Short PENN ETF
- REX Short PTON ETF
- REX Short HOOD ETF
- REX Short TLRY ETF
It’s likely that Rex Shares will file to offer additional single-stock ETFs in the near future.
Direxion and GraniteShares have also indicated that they plan to roll out more than two dozen leveraged and inverse single-stock ETFs at some point in 2022, or early 2023.
As with any new product, investors and traders may want to consider mock trading (i.e. paper trading) single-stock ETFs before deploying a live position in the market. Taking this approach allows one to learn how these positions behave without the risk of capital losses.
To learn more about trading leveraged and inverse ETFs, check out this installment of Options Trading Concepts Live on the tastytrade financial network.
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Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.