The Fear of Missing Out - or FOMO for short - is an anxiety which traps people into an uncomfortable feeling that they must participate in this or that so they don't miss out on an opportunity.
In investing, FOMO trades can trap even the most experienced of investors into poor trades. This is because these trades are made from the dangerous assumption that events that have occurred, will continue to occur. In other words, FOMO trades are mostly made because a stock is going up and the trader believes that the stock will continue to rise, no matter how substantial the advance that already occurred was.
One thing to remember about markets is that they are very good at overreacting to news. This is shown by the fact that stocks tend to pull back after a strong rally, and sometimes fall sharply during a subsequent trading day. Investors quickly go from bullish on the news to bearish, as new price levels exceed what investors think the stock is worth.
So did you purchase the stock because a Reddit user gave a colorful, meme-inspired bull case?
FOMO.
Did the stock rise 12%, so you bought it?
FOMO.
Did your favorite Technoking tweet about the blockchain, which caused a rally so you decided to buy in?
Decentralized FOMO.
Investing with FOMO leads investors to invest with a "grass is greener" mentality that stems from the deadly sins of greed and envy. This leaves investors with trades that are potentially deadly to their portfolio because they were set up to fail from the beginning from a lack of due diligence.
Despite the fact that making trades based on FOMO is bad, an ETF that is quite literally called the "FOMO" ETF was recently launched to give investors a new way to YOLO their gains on risky stocks. The FOMO ETF satisfies an investor's itch to participate in crazy price swings, without obligating them to follow Reddit forums or Elon Musk’s Twitter to stay ahead.
The FOMO ETF will help investors risk-up their portfolio by investing in meme stocks, special-purpose acquisition corporations (SPACs), other ETFs and ETNs, and cryptocurrencies, according to the prospectus. The ETF rebalances weekly to "stay in harmony with market trends" and aims to not have investments concentrated too heavily on any individual meme-stock, coin, or otherwise.
FOMO currently holds 101 positions and, despite not having any limits to the portion that an investment can make up, the largest position is Keurig Dr Pepper (KDP) at 2.35%. The original meme stock Gamestop (GME) makes up just 1.11% of the fund, while its Reddit compatriot AMC (AMC) makes up 1.83% of the fund.
On the surface, the investment looks like a Cathie Woods-alternative fund for adding risk and return to a portfolio. However, if you want a hands-off ETF for YOLO investing, you will pay a premium of 0.9% to Tuttle Capital Management, the fund's manager, which comes out to be $9 per year for every $1,000 invested in FOMO.
This isn’t the highest expense ratio, not even for Tuttle Capital Management whose Fat Tail Risk ETF (FATT), which aims to be the exact opposite of the FOMO ETF in that it aims to protect investors from drastic swings, charges 1.15%. But it certainly isn’t a low expense ratio, as the average is just 0.44%, or $4.40 per year for every $1,000 invested. Meanwhile, the ARK Innovation ETF (ARKK) comes in at 0.75%, or $7.50 per year for every $1,000 invested.
So while adding the FOMO ETF may seem like a good way to simplify YOLO trading, it certainly does come at a relatively expensive premium. Furthermore, owning shares of FOMO will expose your portfolio to some of the most volatile investments out there, and while that could mean big gains, it is also just as possible that the stocks fall out of favor and the fund acts as a drag on your portfolio.
So should you feel pressured into buying some shares of FOMO? No, not at all. This is intentionally a very risky investment, so if you aren’t a fan of wild rides, then it is not for you.
But even if you do enjoy making high-risk investments, an ETF approach may not be the best for you because each holding represents, on average, just under 1% of the total holdings. Meaning, large swings in AMC will only account for a small amount of the day's move as far as the ETF is concerned. That is basically just to say that, if you love YOLO investing, and are good at it, then you will probably do better, and have more fun, just buying shares in the stocks, rather than diluting your returns with 100 other memes.
So who is the FOMO ETF best for? In my opinion, it's in the name. Investing in FOMO could only be best for you if you really want to participate in meme stocks, but don’t want too much risk from choosing the wrong meme nor to have to worry about being too early or late to the next party.
If you participate in the YOLO investing culture, you’ll probably feel (right or wrong) that you could outperform the FOMO ETF just because you won’t have week old memes dragging your investment. But if you really, really want GME shares so you can say you participated without all the worry that comes with, then go for it. After-all, it's 2021, and there’s a participation trophy for everyone.
