Direxion has launched a new ETF targeting penny and so-called ‘meme stocks’.

David Mazza, Managing Director, Head of Product at Direxion.

Listed on NYSE Arca, the Direxion Low Priced Stock ETF (LOPX US) aims to capitalize on the spike in interest in unloved small- and micro-cap stocks, fuelled in part by the recent meteoric stock market performance of GameStop and AMC Entertainment.

The fund, which is linked to the Solactive Two Bucks Index, invests in stocks with share prices between $2 and $5, a range that the SEC characterizes as penny stock territory.

The fund is the first of its kind to explicitly track such stocks and by doing so offers investors a systematic way to play the meme stock theme with significantly less stock-specific and liquidity risk than investing in individual names.

Meme stocks are the shares of often overlooked or out-of-favour companies that are typically trading as penny stocks that have seen a recent surge in volume and momentum, usually as a result of heightened social media buzz on platforms such as Reddit and Stocktwits.

As well as appealing to investors looking to capitalize directly on the meme theme, the fund may also resonate with investors searching for new diversification opportunities as well as with investors seeking to earn risk premia in less traversed areas of the equity market.

Index methodology

The index is composed of 50 stocks equally weighted and is constructed from a universe of securities that broadly corresponds to the entire regulated listed US equity market.

To be eligible for inclusion, a stock must have a share price of between $2 and $5, a market capitalization of at least $85 million, and a minimum average daily value traded of $1m over three months prior to its inclusion.

Once admitted to the index, a company’s share price can appreciate to up to $10 or fall to $1.25 before it is automatically ejected from the index at the next reconstitution and rebalance.

If at the point of reconstitution and rebalance, fewer than 50 securities meet the inclusion criteria, the market capitalization requirement is relaxed (it is adjusted down) until a total of 50 securities are eligible for inclusion.

The index is rebalanced and reconstituted quarterly in February, May, August, and November.

As of June 30, 2021, the 50 constituents had a median total market capitalization of $1.3 billion with total market capitalizations ranging from $60 million to $29 billion. It was concentrated in the energy and health care sectors.

Neglected stocks

Commenting on the launch, David Mazza, Managing Director, Head of Product at Direxion, said: “Investors and traders are increasingly interested in gaining exposure to stocks outside of traditional indexes. On average, low priced stocks have four times fewer analyst recommendations than mega-caps, highlighting their lack of coverage by investment banks. LOPX provides a way for Main Street investors to take advantage of stocks neglected by Wall Street research, which may be ripe for potential outperformance.”