(Bloomberg) — The largest holding in Direxion’s new budget fund is one of the most famously expensive stocks in the country.
A quirk of indexing means that AMC Entertainment Holdings — currently more expensive than about 90% of S&P 500 members — has yet to move beyond the benchmark of cheap stocks tracked by the publicly traded fund.
As a result, the cinema operator and Reddit favorite accounts for nearly 7% of the Direxion Low Priced Stock ETF (ticker LOPX) on its first trading day on Thursday. While the product targets companies with stock prices between $2 and $5, AMC closed at $40.78 on Wednesday.
The paradox is the latest headache caused by Wall Street’s unprecedented indexing boom. As more cash tracks benchmarks and market swings become extreme, these slow-moving instruments can expose investors to companies that no longer reflect their objectives. Most indices rebalance quarterly or semi-annually.
Read more: A $15.3 Billion Quant ETF Loses on Badly Timed Rebalancing
In the case of LOPX, which tracks the Solactive Two Bucks Index, the next quarterly rebalancing will occur in August, after which AMC will almost certainly be delisted.
“We’re going to sell it,” Dave Mazza, head of product at Direxion, said by phone. “And hopefully we’ll buy another company that could have the same potential.”
The Solactive Two Bucks index went live in April, but historical data suggests that AMC would have entered the gauge about a year ago, when the stock was trading around $4. The company is up more than 1,800% in 2021 amid the mania surrounding so-called meme stocks, which enjoy the backing of an army of online retailers.
According to Mazza, that audience is the primary target of the new fund. While AMC’s presence makes for an unusual start, it’s a reminder that the ETF could well capture future Reddit-driven rallies.
“This is a very interesting time in the multi-level market,” said Mazza. “Some of the newer investors are used to only having excessive returns.”
LOPX’s other participations are more in line with the objectives. Tellurian Inc. and billboard advertising agency Clear Channel Outdoors Holdings — both trading for less than $4 a share — are among them. The fund has a 0.5% fee.
(Updates for current trading.)
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