From the GameStop frenzy of 2021 to the recent surge for Reddit and Truth Social , many investors likely have a fear of missing out (FOMO) on these seemingly lucrative opportunities. However, for those investors for whom “meme” stocks come with risks beyond their appetite, there may be a less volatile way to capitalize on the trading phenomenon, according to Hannah Gooch-Peters, global equity investment analyst at Sanlam Investments. Meme stocks, which gained popularity through social media platforms like Reddit and Twitter, have attracted retail investors looking to make a quick profit. In 2021, GameStop shares skyrocketed by more than 1,500% in just a few weeks, driven by a coordinated effort from retail investors on the Reddit forum r/WallStreetBets . While some investors made substantial gains, others were left holding the bag when the bubble burst. For retail investors in particular, Gooch-Peters stressed the importance of having a long-term investment horizon, saying, “If you want to compound your wealth over the long term, look out over five to 10 years. And I think that really is the sweet spot.” Gerry Fowler, chief European equity strategist at UBS, noted that the market structure had changed significantly recently, with quantitative funds playing a more significant role in day-to-day fluctuations. This means that retail investors are often in a disadvantaged position when trading. Cashing in So, what can investors do to capitalize on the trading phenomenon without taking on the risks associated with meme stocks? Gooch-Peters suggests looking at the exchanges themselves, citing Intercontinental Exchange (ICE) as an example. ICE is held in Sanlam’s Global High Quality equity fund, which is advised by Gooch-Peters. ICE, which owns the New York Stock Exchange and several other exchanges, offers trading in stocks, bonds, commodities, currencies and derivatives. The company earns money every time securities trade at its venues. ICE 1Y line The company reported its biggest revenue and profits in 2021, partly due to heightened volatility in financial markets and the meme stock trading frenzy. Intercontinental Exchange also sells market data, which investors use for trading. For the 2021 financial year, the company posted a 40% net profit margin, according to FactSet data. Although, in its latest financial year, profit margins have returned to their pre-Covid norm of 25%. The business is made more lucrative by the fact the sector is dominated by just four companies: ICE, Nasdaq , CBOE and CME . Other exchange providers, like IEX, have not taken market share from the dominant player in decades. “The barriers to entry are so high, and they’re playing into this,” Gooch-Peters said. Trading in options and futures contracts, derivatives that are highly profitable for the exchanges, rose during 2021. UBS’ Fowler noted that such trading activity has also risen recently, which may impact ICE’s earnings potential. The consensus price target of all analysts points to 11.4% upside for the company’s share price over the next 12 months, according to FactSet. However, Fowler also warned that the market’s performance is sometimes dislocated from consumer confidence, which is usually closely related. “We’re starting to see that again, just in the last couple of months, where the market keeps going up. And yet consumer confidence has stopped going up,” he added.
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