Can an exchange traded fund (ETF) that identifies its holdings based on social media chatter and speculation live up to its BUZZ?
That’s exactly what the VanEck Vectors Social Sentiment ETF, which trades under the symbol BUZZ, aims to do. In its first week of trading, however, the ETF has failed to deliver the same sort of hype it is pegged to, and anyone considering the investment vehicle should go in with eyes wide open.
While it is nice to envision the possibility of capitalizing on social media tips or opinions to the degree that many Reddit users who invested in GameStop did back in January, and it doesn’t hurt that the fund is being actively touted on social media by David Portnoy the founder of sports blog Barstool Sports (who has been given an ownership in the ETF for his help promoting it), BUZZ investors should not expect such massive short-term returns.
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Many hot Reddit stocks are not in the fund
This is particularly since many of the stocks eliciting the most excitement on social media lately, such as GameStop, are not among its holdings. And that’s because the ETF tracks the BUZZ NextGen AI US Sentiment Leaders Index (BUZZTR), a stock index just over five years old that is comprised of the 75 large cap U.S. stocks determined to generate the greatest degree of positive investor sentiment between social media and various online postings such as blogs, articles and other alternative datasets.
To be included in this group, a stock must have a minimum $5 billion market value, generate a three-month average trading volume of $1 million and have been consistently discussed on social media throughout the past 12 months. Buzz uses what VanEck describes as an “analytics model using Natural Language Processing technology” to identify stocks that fall into this category — a group that is further narrowed down by an investment committee that ultimately determines the portfolio’s weightings.
BUZZ index is up 215% since launch in December 2015
While the BUZZ index is up 215% since its launch in December 2015, compared with a 113% rise in the S&P 500 during the same period, the new ETF is not starting off as strong. In its first five days of trading, the ETF, which debuted on March 4th at $24.40 per share, has actually been somewhat lackluster. Though the fund garnered investments totalling roughly $280 million in its first two days of trading and rose as high as $25.36 the day of its launch, it has fallen as low as $22.15 and closed at $24.26 on March 10th. And while the idea behind the ETF is appealing, and may well be a glimpse of the future, professional investors remain skeptical.
“One of the things that some of the quants have been trying to do is to identify how often stocks are mentioned using positive sentiment. It requires a lot of algorithms, but it’s not that easy to calculate,” said Erin Gibbs, president and chief investment officer of financial advisory firm Gibbs Wealth Management, who likened BUZZ to a momentum ETF.
Can BUZZ keep up with the pace?
There are also some concerns surrounding the frequency that stocks within the investment portfolio will be reweighted. Social media generated trading frenzies such as the recent GameStop scenario played out within just a matter of days, yet the stocks within BUZZ will only be reweighted once a month.
“When we looked into some of the research on some social media accounts that were available to us the problem was that you have to move so quickly with social media sentiment. You have like three hours for the upside, or the downside, and ultimately stocks tend to follow long-term fundamentals,” Gibbs told The Armchair Trader. “My concern would be that only rebalancing it once a month might not be fast enough,” she said, adding that she would want more information on some of the filters being used by the ETF’s algorithms especially the filters being used to protect longer-term investors.
At present, the top 10 stocks within BUZZ range between online fantasy sports betting operator DraftKings Inc. (DKNG), to more traditional blue chip stocks such as American Airlines Group Inc. (AAL) and Ford Motor Co. (F US), each of which comprise in the area of 3% of the portfolio.