The ‘Buzz’ ETF, which is tracking sentiment on social media, launches Thursday amid Reddit manias in stocks

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Is it time for an ETF that measures the hype?

Measuring enthusiasm for stocks mentioned on social media is all the rage. Now there is an exchange-traded fund for that.

The Van Eck Vectors Social Sentiment ETF (BUZZ) selects 75 stocks with the most optimistic social media sentiment and packs them into an ETF.

This is essentially a momentum index, but instead of tracking stocks that are moving in price, BUZZ tracks stocks that are getting a lot of social media hype.

The ETF is based on the Buzz NextGen AI US Sentiment Leaders Index. What goes into the index is based on an initial list of stocks that meet two criteria: a minimum market cap of $ 5 billion, and that have been consistently and widely mentioned on social media over the past year. There are 250-350 stocks that meet these initial criteria. Then they are ranked from highest to lowest sentiment each month, with the top 75 being included in the index.

Not a Reddit Meme Stock ETF

If you’re looking for something to capture the Reddit sentiment on small stocks like GameStop, you might find yourself disappointed.

“This is not a Reddit Meme Stock ETF,” says Jamie Wise, CEO of Buzz Holdings and creator of the index. “This is about the wider conversation about stocks mentioned on social media platforms. We use broad social media sources, mostly Twitter and StockTwits.” Wise says they also use Yahoo Finance, Benzinga, and Reddit.

How can you determine “social media buzz”? According to Wise, the index uses natural language algorithms that test whether the comment is positive, negative, or neutral, and then ranks each stock based on the level of positive sentiment and the breadth of the discussion. This is key to understanding the index: stocks are weighted on sentiment, not market capitalization, and no stock can exceed 3% of the index. It is rebalanced every month.

“We aggregate the collective sentiment of the community” commenting on stocks on social media, Wise said.

The largest holdings initially include Twitter, DraftKings, Ford, American Airlines and Facebook. Tesla is number 10. The minimum criteria for market capitalization of $ 5 billion would exclude Reddit names like Gamestop, Express or AMC Entertainment from the mix.

Wise says the stocks in the index are proof that they’re not chasing the latest Reddit craze: “These aren’t the stocks that celebrities are promoting. These are everyday stocks that are being advertised by people with a variety of viewpoints aren’t focused on a narrow group of Reddit names. “

Is Social Media Popularity A Good Way To Pick Stocks?

The measurement of stocks based on price dynamics has been around for a long time: Many ETFs that already do this. The largest iShares Momentum ETF (MTUM) picks stocks based on price increases over 6 and 12 months and low volatility over the past three years.

Measuring dynamics based on social media hype hasn’t been around for that long, however. The index on which BUZZ is based has only been live since December 2015.

According to Wise, the index has outperformed the S&P 500 for four of the last five calendar years.

BUZZ vs. Momentum (since foundation: December 18, 2015)

  • BUZZ index: plus 215%
  • Momentum ETF (MTUM) up 119%
  • S & P 500: plus 113%

Source: Buzz Holdings

Much of that outperformance came in 2020. Wise says this isn’t a coincidence: social media has exploded in the last year and a half, which equates to that outperformance.

“This shows that sentiment momentum has outpaced price momentum and market cap momentum,” said Wise over the past five years.

Can stocks be manipulated on social media?

Chat rooms are full of investors with many different motivations, including some who are likely to try to manipulate stocks.

According to Wise, the index’s focus on stocks with a market cap greater than $ 5 billion helps reduce the likelihood that stocks in the index will be manipulated. “The size of the market capitalization and the volume of discussions around these companies make them difficult targets for bad actors to manipulate,” says a FAQ provided by Van Eck.

Portnoy is shopping

Internet celebrity and blogger Dave Portnoy is a partner in Buzz Holdings, which owns the index on which the ETF is based.

For some ETF watchers this is problematic: “We have the owner of an index company that has upplayed an index that is itself the subject of the index,” said Dave Nadig, director of research at ETF Trends. “The point of the index is to find stocks that are being hyped, but Portnoy is the one who pushed the stocks up. It is the subject of its own methodology.”

It highlights the aspect of the “Hall of Mirrors” where social media looks at itself. Nadig says: “Is social media data worth analyzing? Yes. But that is the self-referential quality of social media – they know that they are being watched.” So it’s not clear how much long-term value is extracted.

Wise declined to reveal how much Buzz Media Portnoy owns, but insisted that Portnoy was just a catalyst for conversation: “He’s not here to tell people what to invest in. If Dave says he likes Shopify, a lot of people start. The community may or may not agree. Are they still talking about it two weeks later? We’re measuring if it’s still an ongoing topic. Just because Dave says, “I like Shopify “doesn’t mean it goes in the index.”

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