Over the past few years, retail investors have shown they have the power (money) to take stock prices to 'the moon' if they operate as a group.
Last year it was GameStop (GME) and AMC (AMC).
Just a few weeks ago, it was AMTD Digital Inc (HKD), which was IPO'd in July and has had a trading range of $13.52 per share up to $2,555.30 per share since the initial public offer. HKD is currently trading in the low $200 range.
But just because retail investors can do something, does that mean they should? Are the retail crowd good stock pickers? And should you follow their lead?
At this time, we don't know the answer to these questions. That is because we don't have enough data on whether or not retail investors operating as a whole are good stock pickers. They have only really been flexing their muscle for a little more than a year.
Plus, when they started with GME and AMC, we were still in a bull market. But now, we are in a bear market. So it would be unfair to say the retail investor's recent performance shows their lack of sophistication and that they don't belong picking stocks.
A few Exchange Traded Funds track what retail investors are talking about on social media or buying in their brokerage accounts, and as of late, retail investor stock picks are not outperforming the market.
The VanEck Social Sentiment ETF (BUZZ), which tracks the top 75 companies with the most popular sentiment online based on a proprietary AI model to select stocks, is down 32% year-to-date.
The SoFi Social 50 ETF (SFYF), which tracks the 50 most widely held stocks in self-directed brokerage accounts of Sofi Securities, is down 25.55% year-to-date.
And the FOMO ETF (FOMO), which invests in the areas of the market that are currently in favor with retail and individual investors or currently 'trending,' is down 17.94% year-to-date.
For comparison, a few ETFs that are either managed by professional stock pickers or track the performance of hedge funds are also having a tough year.
The Motley Fool 100 Index ETF (TMFC), which invests in the top 100 stocks selected by Motley Fool analysts, is down 17.64% year-to-date.
The Global X Guru Index ETF (GURU), the Goldman Sachs Hedge Industry VIP ETF (GVIP), and the AlphaClone Alternative Alpha ETF (ALFA), all of which track and mimic the holdings of hedge funds; have produced negative year-to-date returns of 23.22%, 22.90%, and 21.66% respectively.
The performance of these professionally run ETFs shows that even the pros, who are getting paid millions to manage other people's money, are, as a whole, performing just as poorly as the retail investors.
The S&P 500 is what many consider the 'market,' and the QQQ comprises the top 100 technology stocks on the NASDAQ.
However, the SPDR S&P 500 ETF (SPY) is down 12.09% year-to-date, while the Invesco QQQ ETF (QQQ) is down 18.59%. So these are great examples of alternative ETF investments investors could buy as opposed to BUZZ, SFYF, or FOMO.
Furthermore, based on the QQQ's performance, there is an argument that it's not that retail investors are poor at picking stocks but that technology stocks, which represent a large portion of the retail investor-focused ETFs, are having an overwhelmingly lousy year.
The performance of the S&P 500 in 2022 highlights the old argument that stock picking is not worth the time or energy professionals or retail investors dedicate to it.
But again, we are only eight months into the year, which is a tiny snapshot of time for long-term investors. And much of which has been during a bear market.
Historical data (Warren Buffett, Peter Lynch, Carl Icahn, Bill Miller) has shown that some investors can beat the market, and maybe the next great generational investor will come from the retail side, not Wall Street.
Regardless, investors interested in what other retail investors are buying and discussing on message boards may find BUZZ, SFYF, or FOMO attractive since they take the work out of tracking what other investors like and dislike.
My only suggestion would be to make one of these ETFs a small percentage of your total portfolio. The bulk of your portfolio should be in one of the S&P 500, NASDAQ, or other major index-focused ETFs.
Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Good article. Thanks for that.