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Huge GameStop Position Lurking in Some ETFs

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Investors in a couple of ETFs may be surprised to learn that their funds hold 20% of more of their assets in a single stock — the now infamous GameStop.

One of those ETFs, the State Street SPDR S&P Retail ETF (XRT), is equally weighted so any overexposure won’t be corrected until its next rebalancing in March. As of noon on Thursday, GameStop accounted for 19.9% of its assets. 

The other ETF, GAMR, the Wedbush ETFMG Video Game Tech, is market cap weighted and GameStop accounted for over 27% of its assets at noon on Thursday.

Both ETFs were down 8% or more at midday Thursday from the day before but were up about 30% year-to-date due largely to GameStop.

Before this year and especially before this week, the video game retailer was regarded as a sleepy — some say failing — mall-based retailer that had attracted short selling by several large hedge funds. Its stock was trading at $21 a share at the end of last year.

Then investors involved in a forum on Reddit, known as WallStreetBets, took on those short sellers through options trades, forcing the hedge funds to cover their shorts and the market makers who had sold the options to the Reddit day traders to buy the stock to hedge those sales. Every tic higher in the stock price attracted more short covering and hedging.

GameStop stock spiked from $65 a share at the close of trading last Friday to over $480 in early trading Thursday before falling about $200 after multiple trading platforms, including Robinhood, Interactive Brokers, TD Ameritrade and Schwab restricted trading of GameStop shares and in some cases also AMC and other stocks experiencing short squeezes.

‘Short Squeeze in New Clothes’

Ben Johnson, director of global exchange-traded fund research for Morningstar, said the GameStop situation was just a “short squeeze in new clothes,” involving new actors using platforms that can facilitate some sort of coordination among people who are far flung … locking arms to make a dent to more shares.”

Such activity inevitably snowballs first and then stops. “You don’t want to be the one on your heels without a chair once the music stops,” says Johnson.

He added, “Investors should understand what their exposure is and what this means for near-term and long-term performance potentially.”

The Role of Social Media

Dave Nadig, chief investment officer and director of research of ETF Trends and ETF Database, attributes the frenzy in GameStop shares to social media platforms like TikTok sitting on cell phones next to trading platforms like Robinhood.

“Once your TikTok feed is full of stock tips, it’s nearly impossible to get rid of them,” writes Nadig in a new blog post. Once you start following /r/WallStreetBets, you’re going to get the most sensational, clickbait posts bubbled to the top of your window:  Go deep, Go narrow, Stay engaged. And do it in a market designed to take those few seconds of attention and execute on them.”

Nadig noted that day trading in options and challenging short sellers isn’t new, but what is new is “an entire generation of investors is locked at home with little to do and a set of services on their phone designed to funnel them into the most extreme, most dopamine-driving financial ideas.”

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