As Inflation Peaks, Thematic ETFs Surge

Meme stocks and other thematic exchange traded funds (ETFs) have recently made significant gains.

What is a meme stock?

A meme stock is a stock that has gone viral and gained an online following via social media and other digital platforms. These communities hype the stocks by discussing them online and using their own platforms to promote the stocks to their followers.

These coordinated efforts have influenced share prices and caused meme stocks to become overvalued, sometimes for prolonged periods.

Those who invest in these types of stocks are typically young and inexperienced.

What is thematic investing?

Thematic investing is when investors do not focus on companies or specific sectors. Instead, they invest based on trends that are predicted to last long-term. Specifically, they capitalise on investment opportunities which will be created by trends in technology, geopolitics, and macroeconomics.

Which stocks have boomed?

Roundhill Meme (MEME) and VanEck Social Sentiment (BUZZ), two popular meme stock ETFs, have increased in value since their drops late July. The former went up 24% and the latter 17%, both reversing recent slumps.

Meme ETFs have been said to be buoyed by “animal spirits”—or investment prices that rise and fall as a result of human emotion rather than the inherent value of the stock.

These ETFs have led to increases for stocks that target renewable energy, robotics, and housing. They have all experienced robust inflows after equity markets peaked last year, causing many of them to face hefty outflows.

Several renewable energy ETFs rode this wave. First Trust Nasdaq Clean Energy Index Fund (QCLN), iShares Global Clean Energy (ICLN), and InvescoSolar (TAN) all rose between 20 and 22%.

While the funds fell short of the S&P 500’s dip, they have beaten its July rally. They have thus lived up to the hype advocated by Redditors who have billed these funds as high beta (meaning they are risky but have high return potential) investments driven by sentiment.

What triggered the strong performance?

These ETFs have kept afloat for two reasons. 1) There are signs pointing to the potential of an inflation peak. 2) Legislation will make way for an increase in clean energy.

It is expected that US inflation will soon reach its peak (if it has not already). This will allow the Federal Reserve to cut interest rates next year, which is seemingly the catalyst for such a turnaround. As we head into the fourth quarter, investors are becoming more confident that the economy will slow, and recession will be avoided. They are thus more willing to take on riskier investments.

Additionally, because these funds are typically high beta, they too are recovering as the US equity market recuperates.

The approval of the US Inflation Reduction Act has also helped some stocks surge. It is predicted that this will especially boost clean energy and climate-conscious funds.

Countries around the world are beginning to introduce legislation to combat climate change. Consequently, there is an increasing interest in thematic ETFs related to sustainability and renewable energy. Any time legislation has been introduced to support clean energy efforts, related stocks have benefited. This is tempting to growth-oriented or tactical investors.

Companies benefiting from their green initiatives have more lasting power than those gaining traction because of internet memes. Market signals often come from online forums, specifically Reddit. Evidently, data regarding alternative sentiment is a useful tool which can help indicate projected prices. Chatter on social media often predicts future surges in price. This was certainly true for stocks like GameStop, Bed Bath & Beyond, and AMC. However, interest in meme stocks usually fritters away after they have drawn in an eclectic group of investors and companies because they have no intrinsic worth.

Speak to an expert

While some types of thematic investing are risky, such as meme stocks, others, like climate-conscious funds, present more opportunities for sustained growth.

Private Client Consultancy is committed to helping you diversify your portfolio and incorporate ESG in a way that matches your attitude towards risk. Read our sustainability commitment here.

To discuss your plan with a Wealth Manager, contact us today.