When Direxion’s new budget-stock fund starts trading on Thursday, its biggest holding will be one of the most famously expensive shares in the country.
A quirk of indexing means that AMC Entertainment Holdings — currently pricier than about 90% of S&P 500 members — has yet to exit the gauge of cheap shares tracked by Direxion’s new fund.
The exchange-traded fund from Direxion, which manages mutual funds and ETFs that use leverage and debt to potentially magnify returns, is designed to focus on 50 companies trading between $2 and $5 at the time of selection, according to the firm’s website. AMC closed Wednesday at $40.78. As a result, AMC, the world’s largest movie-theater operator and a Reddit favorite, will account for 6.95% of the Direxion Low Priced Stock ETF (ticker LOPX) on its first day.
Bloomberg News
The paradox is the latest headache spurred by Wall Street’s indexing boom. As more cash tracks benchmarks and market swings turn extreme, these slow-moving gauges can leave investors exposed to companies that no longer reflect their aims. Most indexes rebalance every quarter or semi-annually.
In the case of LOPX, which follows the Solactive Two Bucks Index, the next quarterly rebalance is due in August, at which time AMC will almost certainly be dropped.
“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 that same potential.”
While the Solactive Two Bucks index went live in April, historical data shows that AMC would have qualified to enter the gauge about a year ago, when its shares were trading around $4. AMC warned investors last October that it was on the edge of bankruptcy as the COVID-19 pandemic closed cinemas, and traded at around $2 a pop at the start of 2021. But it peaked at over $62 — an 1,800% surge — in early June as a so-called meme stock, which enjoy the support of an army of online retail traders.
That crowd is the primary target for the new fund, according to Mazza. While AMC’s presence makes for an unusual start, it’s a reminder that Direxion’s new ETF could capture future Reddit-fueled rallies.
“This is a very interesting time in the market on multiple levels,” Mazza said. “Some of the newer investors have been accustomed to only having outsized returns.”
LOPX’s other holdings look more in keeping with its goals. Natural gas company Tellurian Inc. and billboard advertising company Clear Channel Outdoors Holdings — both trading at less than $4 a share — are among them. The fund carries a 0.5% fee.
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