(Bloomberg) -- With penny stocks all the rage in Reddit forums and across the Robinhood trading platform, U.S. retail investors are pulling money from microcap funds just to support the habit.
Managed by BlackRock Inc., the $1 billion IShares Micro-Cap ETF, known by its ticker symbol IWC, has seen nearly $26 million of net outflows over the past 12 months. The $129 million First Trust Dow Jones Select MicroCap Index Fund, or FDM, has seen withdrawals of $19 million.
“Given the rally in small caps, you might not expect that to be the case,” said Ryan Issakainen, a strategist with First Trust Advisors LP. Investors have been favoring more sector-themed funds, such as those tied to the hot segments of clean energy and cyber security, he said.
The outflows reflect the fact that funds just don’t offer the same kind of jaw-dropping gains that day traders bidding up individual penny stocks are becoming addicted to. So far this year, shares in IWC have gained about 13%, while FDM is up almost 8%, paling in comparison to some of the hottest individual microcaps: health-care companies Zomedica Corp. and TransEnterix Inc. have soared roughly 370% and 450%, respectively.
With so many people out of work or working from home, the penny stock fervor is not going away anytime soon. One Reddit trading forum dedicated to penny stocks crowed as it entered the Top 1,000 subreddit pages. Still, it’s description cautioned the 400,000 members: “Advice from redditors may not be in your best interest.”
Not all funds are shunned by retail investors. ETFs from Vanguard and State Street that follow the S&P 500 as well as Cathie Wood’s ARK Innovation ETF are among the most revered on Robinhood’s trading platform.
There’s still some hope for thus-far neglected funds, according to Nate Geraci, president of investment-advisory firm the ETF Store.
“When some of these retail investors are burned by individual stocks the next step is going to be to diversify and I think thematic ETFs are a natural next step there,” Geraci said. “It’s a good entry into diversified investing for the younger Robinhood trader.”
--With assistance from Claire Ballentine.