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Enthusiasm seems to be for the underlying meme stocks rather than the meme ETFs themselves, which have seen flat or negative flows. REUTERS/Dado Ruvic/Illustration/File PhotoDado Ruvic/Reuters

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Beaten-up meme and thematic stock exchange-traded funds have made dramatic gains in recent weeks, buoyed by signs of a possible peak in inflation and U.S. legislation paving the way for a boom in clean energy.

The meme stock ETFs that were emblematic of the growth stock-fuelled market rallies of 2020 and 2021 have surged with Roundhill Meme ETF MEME-A up 24 per cent since its low on July 26, after having plunged 60 per cent since its December 2021 launch. VanEck Social Sentiment ETF BUZZ-A is up 17 per cent, partially reversing a 49 per cent slide from its November highs, and SoFi Social 50 ETF SFYF-A up 16 per cent after a 43 per cent slump.

The animal spirits buoying meme ETFs have also lifted those targeting renewable energy stocks, housing, infrastructure and robotics, all of which have enjoyed strong inflows, in many cases after having endured chunky outflows since equity markets peaked late last year.

Ark Investment Management LLC’s high-profile Ark Innovation ETF ARKK-A, a barometer of enthusiasm for a swath of punchy technology stocks often trading at speculative valuations, has also clawed back 14.8 per cent since July 26, recovering a small slice of its 65 per cent loss since November.

The funds all undershot the S&P 500′s slide on the way down but have beaten its 7.4 per cent rise since late July, living up to their billing as sentiment-driven, high-beta investments beloved by the Reddit WallStreetBets crowd.

Several renewable energy ETFs have also ridden the same wave, with the Invesco Solar ETF TAN-A jumping 21 per cent since July 26, iShares Global Clean Energy ETF ICLN-Q rising 20 per cent and First Trust Nasdaq Clean Energy Index Fund QCLN-Q firming 22 per cent.

“These funds tend to be high beta, so it shouldn’t be too surprising that as the U.S. equity market has ticked up again, that these funds too have recovered some ground over recent weeks,” says Kenneth Lamont, senior fund analyst for passive strategies at Morningstar Inc.

The primary catalyst appears to be mounting expectations that runaway U.S. inflation is close to peaking or has already done so, potentially allowing the U.S. Federal Reserve Board to ease up on its interest rate hiking cycle later this year and begin cutting rates in 2023.

This, in turn, feeds through into a lower interest rate used to discount the future profits expected for high-growth companies.

“Investors are more comfortable that the Federal Reserve is going to be able to slow the economy and avoid recession, and these investors are willing to take on more risk heading into the fourth quarter and 2023,” says Todd Rosenbluth, head of research at VettaFi LLC.

A second driver, for some stocks at least, appears to have been Senate approval of the Inflation Reduction Act, which clears the way for the largest single investment in clean energy and climate programs in U.S. history.

“Legislation supporting clean energy efforts has been a benefit to related stocks, perhaps tempting tactical or growth-oriented investors off the sidelines,” says Lois Gregson, senior ETF analyst at FactSet Research Systems Inc.

Mr. Rosenbluth saw this trend as having more legs.

“The pending climate change-fighting legislation has renewed interest in renewable energy and other thematic ETFs. Those likely have more staying power than less profitable companies benefiting from interest via memes,” he says. “Meme investing seems to be an eclectic and amorphous group of companies that gain a following and then that following peters out.”

ETF investors – if not necessarily those in the underlying stocks – appear to agree with this prognosis. Invesco Solar ETF, iShares Global Clean Energy ETF and First Trust Nasdaq Clean Energy Index Fund took in a combined US$291-million in the two weeks ended Aug. 5, according to FactSet data, having shipped US$1.2-billion since the start of November 2021.

The surge in enthusiasm for these narrow bets is in contrast to that for U.S. stocks at large, with three broad market ETFs – Vanguard S&P 500 VOO-A, iShares Core S&P 500 IVV-A and SPDR S&P 500 ETF SPY-A – seeing collective inflows of only US$1.9-billion in the fortnight to Aug. 5, no pick up in the pace of flows, which have hit US$55.3-billion since November.

Despite the surge in the price of meme ETFs, investor enthusiasm for the vehicles seems sparse, with most such ETFs seeing flat or slightly negative flows in recent weeks, according to FactSet, even as key holdings such as Coinbase Global Inc. COIN-Q and AMC Entertainment Holdings Inc. AMC-N have jumped 70 per cent or more since late July.

However, social media-driven sentiment for their underlying holdings certainly seems to be back.

Marina Goche, chief executive of Sentifi Group AG, an alternative data provider, says it saw a sharp rise in “chatter” on social media, news forums and blogs around stocks such as Bed Bath & Beyond Inc. BBBY-Q (up 125 per cent since late July), AMC and GameStop Corp. GME-N even before their price surges.

“Much like last year, alternative sentiment data have again come to the fore as important tools for indicating early murmurs of price, with a lot of market signals happening in online forums like Reddit before the price moves,” Ms. Goche says.

“I was surprised that this trend of investing has re-emerged,” Mr. Rosenbluth adds. “It wasn’t just a one-time fad, but there are more prudent ways for ETF investors to put money to work.”

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