- A rebound in technology shares should help retail investors move back into bets on single stocks, said Vanda Research.
- Retail investors on a weekly basis were mostly buying equity ETFs such as SPY and QQQ.
- A tech-sector rebound 'will help them … rebuild the capital buffer to take on riskier bets," said Vanda.
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Technology shares have taken a beating recently, and it's going to take recovery in the sector to rekindle the risk appetite of retail investors, according to a research firm.
The tech-heavy Nasdaq Composite index has slumped 1.5% so far this week, dragged down by escalating inflation fears. Meanwhile, a plunge in cryptocurrency prices has rippled through stocks and exchange-traded funds linked to digital currencies. Bitcoin plunged as much as 31% on Wednesday to test the $30,000 threshold.
Vanda Research finds that retail investors have been buying recent dips in equities, but they've been doing so mostly through stock ETFs like the SPDR 500 ETF Trust (SPY) or the Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100 index. The company's data analytics arm monitors daily retail investing activity in about 9,0000 US stocks and ETFs.
Those purchases have exceeded single stock buys if taking leverage into account, said Vanda.
"We attribute this dynamic to the lack of clear opportunities in retail favorite stocks like EVs, hydrogen, cannabis and the ARKK complex, which is driving retail investors to purchase indexed funds instead," said Giacomo Pierantoni, research analyst, in a note published Wednesday.
The ARKK complex refers to the ARK Invest and its family of popular ETFs that's run by high-profile investor Cathie Wood. The flagship ARK Disruptive Innovation ETF has slipped roughly 2% since the end of last week as inflation and rate fears hurt high-growth, tech-focused investments.
One "important factor for retail investors to re-engage with equities is a recovery in tech stocks," said Vanda. "Because a large part of their portfolio is tilted towards the sector, a rebound will help them to cover some of their recent losses and rebuild the capital buffer to take on riskier bets."
Vanda noted that GameStop, a popular stock with retail investors, has lacked flows from such investors this week. It said GameStop's recent rally was most likely driven by institutional short-sellers who were pre-emptively closing shorts as prices in stocks favored by retail investors active on Reddit's Wall Street Bets forum surged. AMC Entertainment, meanwhile, had experienced an increase in retail flows.
"Why did retail investors pick AMC? As opposed to GME, where short positions have been high but stable, AMC has seen a large increase in short interest over the last couple of months," said Vanda.