Beware these funds you may own with an AMC bubble brewing inside

Published Thu, Jun 3 20211:36 PM EDTUpdated Thu, Jun 3 20212:19 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The swings in stocks like AMC may be a source of constant entertainment for traders on Reddit or at hedge funds, but it could be creating risks in the portfolios of more passive investors. AMC's dramatic run — it closed at $62.55 per share on Wednesday, up from $9 per share in early May, and saw a wide intraday swing on Thursday — has ballooned the stock's position in several passive funds. The stock is now one of the biggest holdings of some major exchange-traded index funds, including some billed as value plays. One of the most notable funds on the list is the iShares Russell 2000 Value ETF . AMC was the fund's biggest position, with a value of $270 million and a weight of 1.54% as of Wednesday's close, according to FactSet. The Vanguard Small Cap Value ETF has a similar dynamic, with a stake in AMC of more than $400 million. That is the fund's largest holding. The relatively large bets on AMC from value funds come from the passive management, low-turnover style of the funds. Such funds will usually just change their holdings when the index they are tracking changes. This can leave stocks that no longer fit the parameters as part of the benchmark mis-categorized for several weeks or even longer. Index funds and ETFs have risen in popularity because their broad exposures can help investors make sure that they don't miss out on a hot stock. These funds can also mitigate the risk of market underperformance because of a poorly performing fund manager. However, that lack of human involvement also means investors can be exposed to potential bubbles in stocks like AMC, which most Wall Street analysts predict will fall dramatically. To be sure, there are other funds that have even larger weights on the theater chain than those value plays. The Invesco Dynamic Leisure & Entertainment ETF — which is rebalanced quarterly — had nearly 20% of its portfolio tied up in AMC as of Wednesday's close, according to FactSet. The ETF has been seen as a good way to play the economic reopening. In the SoFi Social 50 ETF — which is rebalanced monthly and is designed to buy stocks that are popular among SoFi users — the stock has an even higher weighting. AMC is not the only stock where this pattern can be observed. GameStop, for example, is the largest holding in the iShares Core S & P 500 Small Cap ETF and a major holding of some of the same value funds that have significant exposure to AMC.

Traders on the floor of the NYSE.

Source: NYSE

The swings in stocks like AMC may be a source of constant entertainment for traders on Reddit or at hedge funds, but it could be creating risks in the portfolios of more passive investors.

AMC's dramatic run — it closed at $62.55 per share on Wednesday, up from $9 per share in early May, and saw a wide intraday swing on Thursday — has ballooned the stock's position in several passive funds. The stock is now one of the biggest holdings of some major exchange-traded index funds, including some billed as value plays.