The logos of Google, Facebook, Instagram, Twitter, Snapchat and TikTok are displayed on a computer screen.
Denis Charlet | AFP via Getty Images
Is it time for an ETF that measures the hype?
Measuring enthusiasm for stocks mentioned on social media is all the rage. There is now 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 US Sentiment Leaders Index from Buzz NextGen AI. The index is based on an initial list of stocks that meet two criteria: stocks with a minimum market cap of $ 5 billion and consistent and diverse social media mentions over the past year. The 250-350 stocks that meet these initial criteria are ranked from highest to lowest sentiment each month, with the top 75 being added to 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," said 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 said it also uses 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 prove they aren't chasing the latest Reddit craze. "These aren't the stocks that celebrities are promoting," Wise said. "These are everyday stocks that are promoted by people with a variety of viewpoints and don't focus on a narrow group of Reddit names."
Is Social Media Popularity A Good Way To Pick Stocks?
Measuring stocks by price momentum has been around for a long time, and many ETFs already do. The largest iShares Momentum ETF (MTUM) picks stocks based on price increases over six and twelve months and low volatility over the past three years.
Measuring dynamics based on the social media hype hasn't been around for that long. 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) plus 119% S & P 500: plus 113%
Source: Buzz Holdings
Much of that outperformance came in 2020. Wise says this is not a coincidence as 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 over the past five years," said Wise.
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 their market capitalization and the volume of discussions surrounding these companies make them difficult targets for bad actors to manipulate," says a Van Eck FAQ sheet.
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, Research Director 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."
Nadig added, "Is social media data worth analyzing? Yes. But that's the self-referential quality of social media – they know it's 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 let people know what to invest in," said Wise. "When Dave says he likes Shopify, a lot of people start talking about it. 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 it says "I like Shopify" doesn't mean it will be included in the index. "
Subscribe to CNBC PRO for exclusive insights and analysis as well as live business day programs from around the world.