Tag Archives: TSLA

New Index Will Drive Demand for AMC, Other Meme Stocks

Note: This is not financial advice.

Robinhood Markets is launching a new index fund to track meme stocks. From a report that broke this morning in The Wall Street Journal:

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Robinhood Markets is launching an index to track the favorite stocks of its millions of predominantly young, social-media-savvy customers.

The brokerage firm’s new “Robinhood Investor Index” will track the performance of the 100 investments most popular among its user base. Initially, the top five stocks in the index will be Tesla , Apple, Amazon.com, Ford Motor and meme-stock favorite AMC Entertainment Holdings. Robinhood said it would update the composition of the index monthly, offering a view into its customers’ changing tastes.

In an unusual approach to constructing an index, Robinhood said it would weight stocks in the index by the “conviction” customers have in them, defined as the percentage of assets in a customer’s portfolio devoted to a particular stock.

The new index will increase demand for meme stocks, especially those weighted heavily like AMC and Tesla.

When a stock is included in an index like the S&P 500 for the first time, the price generally jumps. This is because so many index funds track the S&P 500.

When a stock is added to it, those funds must buy the stock. Similarly, when investors buy shares of the new Robinhood index, Robinhood must buy stocks like Tesla, AMC, etc.

This increases demand for those stocks.

Indeed, a McKinsey study found that stocks added to the S&P 500 jumped a median of 5%. But the increase was short-lived, disappearing in just 20 days on average.

The effect of inclusion in the Robinhood index is likely to be more modest, given that $5.4 trillion tracks the S&P and the Robinhood index is just getting off the ground. Still, I expect a modest tailwind for meme stocks from this change.

The Robinhood index is an interesting approach. It allows investors to profit from the “wisdom of the crowd,” following investors who have strong conviction about particular stocks.

If an investor is confident enough to put their entire portfolio into a single stock, maybe they know something I don’t.

I’ll be curious to see how the Robinhood index does against other index funds. And you can bet every broker is rushing to create a meme index as we speak.

What do you think of Robinhood’s new meme stock index fund? Leave a comment at the bottom and let me know!

Have a great weekend everybody! 👋

More on markets:

AMC Fails to Deliver Pass 700,000 in New Report

Morgan Stanley Investigation Spreads to Multiple Countries

Hedge Fund Manager’s Arrest Shows How Market Manipulation Works

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