Consolidated sentiment: Meet the social media-driven MEME ETF

For investors looking to take heavy risks on assets that may be set to short squeeze their way to 1,000% rallies, investing in meme stocks has been a lucrative practice throughout 2021 for those who have an eye for social media sentiment. Now, the task of cherry-picking these high-potential stocks could be taken care of in the world’s first meme-based exchange-traded fund, which tracks an index of stocks trending on social media. 

The MEME ETF, created by Roundhill, promises to provide investors with a way of betting on their favorite assets with a little less risk by automatically diversifying their portfolio through other meme stocks. Roundhill’s exchange-traded fund is currently seeking regulatory approval from the US Securities and Exchange Commission, and the firm intends to track stocks that have a “high level of mentions on social media, combined with high short interest,” according to Reuters.

(Image: Axios)

As we can see from the selection of meme-based stocks above, there can be extremely high returns awarded to investors who take the gamble of buying into stocks according to social media sentiment, rather than the fundamentals of the companies themselves. In the case of AMC, shares grew some 2,659% in 2021. However, social media sentiment has also seen some investors buy into meme stocks at the peak of their rally only to be left with deep losses. 

Roundhill’s ETF promises to make it safer for investors to follow meme stocks, but how can an exchange-traded fund help to add more solidity for investors who enjoy dabbling in risky stocks? Let’s take a deeper look at how MEME may change the retail investing landscape: 

How the MEME ETF Could Change Retail Investing

Exchange-traded funds allow individuals to invest in multiple stocks at the same time by trading shares in the ETF instead - paving the way for far easier diversification. Most ETFs focus on stocks that belong to a more traditional investing theme - for instance, the S&P 500, or a specific market sector like tech firms. 

ETFs can provide investors with the opportunity to buy multiple stocks that resonate with them in one fell swoop. While they can be based on certain markets, others, as Freedom Finance Europe suggests, can appeal more on an ideological level - like in the case of renewable exchange-traded funds. 

The new MEME ETF, however, will look to build an index of stocks that are favourites among retail investors by gauging social media intent. 

Roundhill are no strangers to the world of ETFs, and the firm already operates six others that track various market assets. The company claims that its ETFs offer "targeted, pure-play exposure to the investment themes of the future."

These more future-focused investing themes can revolve around e-sports and digital entertainment, online betting services, and video streaming services. However, now Roundhill looks to pull off an altogether more ambitious project in spotting emerging meme-based investments and adding them to its index. 

This means that meme stocks like that of AMC Entertainment will be added to MEME, or the Solactive Roundhill Meme Stock Index as it’s more formally known. However, to become listed on the ETF, stocks will need to pass a range of selection criteria: 

• Firstly, a stock must first meet a certain daily trading volume and market capitalization benchmark. 
• Trackers will also scan a range of social media sites, recording the volume of mentions each company has received over a two-week period as a means of calculating a ‘social media activity score.’
• Subsequently, the top 50 companies based on their social media activity score will get sorted according to short interest as a percentage of float - with the top 25 by short interest populating the meme index. 
• Finally, the index will undergo an update every two weeks, with stocks continually being rebalanced and replaced based on social popularity and the meeting of selection criteria. 

Compounding Memes with Cryptocurrency

Whilst Roundhill is set to launch the first meme-based ETF, there have already been various movements away from Wall Street over the development of the world’s first cryptocurrency-based exchange-traded fund - with international developers in the world of decentralized finance pushing forward with their plans to offer a fully decentralized incarnation of a crypto-based ETF - which could arrive onto the market imminently. 

Created by DogeHouse Capital, a multi-national cryptocurrency company, the first cryptocurrency ETF is set to contain wrapped digital assets like Bitcoin, Ethereum, Cardano, Polkadot, and more meme-based selections like Dogecoin, Kusama, and DOGEX - the native token of DogeHouse capital. 

Although a meme-based cryptocurrency ETF may seem like an extremely high-risk proposition, it illustrates the growing popularity of meme-based investments not only in traditional financial structures but also in the world of digital finance. 

Although ETFs are traditionally an effective way for investors to protect their portfolios through built-in diversification, the exchange-traded funds of Roundhill and DogeHouse Capital appear to be focused on diversifying stocks based on extremely volatile markets as a means of assuring portfolio growth. 

As 2021 has progressed, meme-based stocks like AMC and GameStop have held their value impressively when short squeezes traditionally come with harsh corrections. With this in mind, social media sentiment may go a long way as a more sustainable option for investing. Although the MEME ETF will be entering Wall Street’s most unstable market, it may yet prove to be a useful tool for investors who are happy to take on a gamble.