Advisors know a few things about stocks with low price tags. First, as the old saying goes, stocks with low prices are that way for a reason and the reason is rarely good.
Second, simply because a stock has a low price tag doesn't make it inexpensive. Third, there are examples of redemption stories from this genre of equities, but stock picking to that effect is no easier than it is anywhere else.
Finally, advisors also know that many clients, particularly the novices, like cheap stocks. Add all this up and it's a good things clients have advisors because this asset class is fraught with risk and temptation and the rewards don't always outweigh the risks. In other words, the low priced stock conversation, rare as it may be, is an opportunity for advisors to advise and drill home the importance of fundamental thinking.
A Better Way to Embrace Low Priced Stocks
These days, there are just 20 members of the S&P 500 trading under $20 and just one $10, but there's a wide universe of other cheap stocks out there that don't qualify for admittance into popular benchmarks.
Combine that with the aforementioned client temptation, and it's reasonable to say there's still some interest in cheap stocks. There may now be a better way to play this asset class, with a small allocation to be sure, thanks to the debut of the Direxion Low Priced Stock ETF (LOPX).
“The Direxion Low Priced Stock ETF offers exposure to the 50 companies trading between $2 and $5 at the time of selection. LOPX may be considered a satellite holding to complement other broader positions within a portfolio,” according to Direxion.
Chalk this up as another interesting addition to the ETF landscape and believe it or not, this a passive fund, meaning there was an index created for cheap stocks – the Solactive Two Bucks Index. There are some requirements – thank goodness – for memberships. Stocks must have a minimum market value of $85 million (micro-cap territory) and stocks that have been reverse split between the index's last and latest selection day are barred.
There are a couple of points in favor LOPX. First, the basket approach keeps investors away from the “gamification” of stocks. Second, there is some hidden gem potential among cheap stocks because many fund managers can't buy them and analysts mostly ignore them.
“Investors and traders are increasingly interested in gaining exposure to stocks outside of traditional indexes,” said David Mazza, Managing Director, Head of Product at Direxion. “On average, low priced stocks have four times fewer analyst recommendations than mega caps, highlighting their lack of coverage by investment banks. LOPX provides a way for Main Street investors to take advantage of stocks neglected by Wall Street research, which may be ripe for potential outperformance.”
LOPX Pluses, Minuses
Perhaps not surprisingly, LOPX isn't sector diverse. Owing to last year's dismal performance in the oil patch, energy stocks account for almost 32% of the fund's weight and because there's always a slew of healthcare names hammered by unfavorable regulatory news, that sector represents over 30% of the new ETF's weight.
Additionally, the top 10 holdings account for about a third of the LOPX, confirming a bit of concentration at the components level.
However, LOPX is a nifty way for investors, particularly those in younger, more risk-tolerant demographics, to get some exposure to potential short squeezes and “meme stocks” – if they remember to consult an advisor regarding proper positioning in this type of fund. Hint: It should be small.
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