Would You Invest in the BUZZ ETF —An Investment Shaped by Online Chatter?

Toby Hazlewood

The never-ending reach and influence of social media

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On March 4th, the outspoken founder and president of Barstool Sports, Dave Portnoy appeared on Fox News to talk about the new Van Eck Vectors Social Sentiment ETF (symbol: BUZZ).

He was bullish about it to say the least:

“I can’t guarantee returns… but in 20 years, I haven’t lost. It takes a lot for me to put my reputation, my balls, on the line. I am doing it this time. Buzz ETF. Thursday. New York Stock Exchange. Is this big? It’s F*cking Huge.”
-Dave Portnoy

The fund has been created to capitalise on the widespread sharing of financial insight and investment data on social media platforms. On Twitter, Reddit, Facebook and in all the usual places, amateur and professional investors-alike talk openly and enthusiastically about their hunches and their trades. This has resulted in a rich and open repository of intelligence that’s there for the taking.

While many who post are likely driven as much by confirmation bias as they are by having genuine insight or well-tested theories to share, the mere presence of chatter is often a good sign that a particular stock is on the move.

The algorithm underpinning the BUZZ ETF is tuned to capture and assess the overarching sentiment surrounding stocks that are hot, and identifies these as potentially ripe for investing in.

Can it work? A test of the algorithm through 2020 picked all the stocks that thrived in 2020 during Covid, generating returns of 84% (compared to just 31% for the S&P 500).

Ker-ching.

How does it work?

Investopedia defines an Exchange Traded Fund (ETF) as:

“a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock.”

The BUZZ ETF is driven by its algorithm, been designed to monitor chatter on the major social media platforms, to assess sentiment and identify worthy investments. The fund takes a position in the 75 most actively and enthusiastically discussed stocks.

They are selected on the premise that overarching sentiment gleaned from a wide sample of social media platforms should be a solid indicator companies who are likely to gain value in the near term.

The asset allocation within the fund is adjusted on a periodic basis (Portnoy suggested quarterly on Fox, but the index guidelines document stipulates monthly). This ensures that stocks which drop out of favour on social channels are sold from the fund and replaced with the new darlings of the day. A monthly adjustment seems appropriate given the speed with which sentiments can shift these days — it’s not so frequent that investments get made in so-called meme-stocks whose prices are temporarily inflated artificially as happened with GameStop.

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The dangerous reach of social media

Portnoy was keen to reference the WallStreetBets and GameStop episode — if only to point out that such events aren’t what BUZZ is about. His perspective is that GameStop wouldn’t have been chosen as a candidate investment for BUZZ since it hasn’t been at the forefront of the collective mind for long enough. His logic is sound, but the ways that social media can be used to influence collective-sentiment and behaviour amongst large groups shouldn’t be underestimated.

If GameStop demonstrated one thing it was that the sentiments stirred up on social media can be a powerful force in influencing human behaviour. Lest we forget, it was the collective agreement to a plan hatched on social media that resulted in a group of retail investors steadily buying stocks in an ailing computer games retailer. The price of GameStop stock rose from around $17 at the start of January to a high in excess of $400 in the space of a few days. It came crashing down again, soon after as investors gradually lost their nerve.

“Power corrupts — and absolute power corrupts absolutely”
-Lord Acton

The GameStop saga has drawn a great deal of scrutiny from the US Government. In the aftermath of the event, regulators are considering new rules and limitations to further control options trading and short-selling. Rules are being reviewed by the Securities and Exchanges Commission and the Financial Industry Regulation Authority to close potential loopholes exposed in early January 2021 by WallStreetBets traders.

Founders of the WallStreetBets collective on Reddit, those who led the movement and encouraged the group to take action are hailed by many as heroes — Jaime Rogozinski founded the group and has done extremely well financially out of investments whose returns were enriched by those following his lead. Keith Gill, aka ‘Roaring Kitty’ on Reddit was another leading light of the group and made $33m out of the GameStop move.

Their motives seem to be driven as much out of exposing inequities within the existing financial establishment as they are about making money. In interviews held since the event, their passion for the cause is clear.

The point of mentioning them in such detail here is to illustrate that no matter what motivates people, social media platforms provide a channel for them to exert their agendas and to stir up frenzies of interest and enthusiasm with relative ease. This isn’t news of course — who can forget the era of Donald Trump.

It’s not just the leaders of movements like WallStreetBets who have the power — everyone on social media exerts power in the information (and misinformation) they choose to share. They simultaneously rob themselves of power by putting their thoughts and opinions out in the open for others to exploit.

I’d be intrigued to know how the artificial intelligence behind the BUZZ ETF learns to filter out such chat that might otherwise skew its recommendations? How can it weed out the cranks and extremists who have an agenda in stirring up conversation on the socials to mislead such an algorithm or pump a stock to suit their own agenda?

An intrinsic link between social media and finance?

An unforeseen side-effect of the WallStreetBets episode has been for activist investor Ryan Cohen to intervene, in a bid to rescue GameStop as a legitimate business — a move that would not likely have happened had the WallStreetBets crew not singled it out in January. The share price of GameStop is currently rallying and in excess of $200 at this point.

While I doubt that a single one of the Sub-Reddit group anticipated this, or even harboured a desire to help the company itself, this again demonstrates the power of social media in bringing about extreme and unlikely outcomes.

One final example of social media’s inextricable influence over the world of finance, is the stoking of the value of Bitcoin since the start of 2021.

There have been many legitimate reasons behind the steady increase in its value, including moves indicating its acceptance by companies within the financial establishment — JP Morgan, Mastercard and BNY Mellon to name just a few.

There have also been significant price moves that were based on less substantial reason — when Elon Musk changed his Twitter Bio to simply read ‘Bitcoin’ for example.

Source: Twitter

At the time, it was considered instrumental in the price climbing above $40,000 — while Bitcoin has since climbed over $50,000 and the profile update has turned out to have been a playful tease regarding Tesla’s investment of $1.5billion corporate treasury into Bitcoin, it demonstrates yet again that social media can have wide-reaching and significant effects across the wider world of finance.

If Warren Buffett were to tweet today that he recommended everyone sold their gold, I bet that at least a few would rush to do so, affecting the price significantly. I wonder, does Buffett even Tweet?

Final thought

I find the notion of BUZZ ETF intriguing and I’ll be watching its performance with interest. Looking at some of the stocks currently held within it, they’re kind of obvious and what you’d expect anyway — Twitter, Apple, Amazon, Pfizer, Netflix and Peloton are just a few of the usual suspects who’ve thrived in recent years, and more-so since Covid-19 was a thing. Naturally they’d be the ones attracting chatter on social media.

What intrigues me most is the long-term effectiveness of the algorithm and how it learns and adapts. It could be interesting to witness how it copes when similarly weird and unforeseen events like WallStreetBets occur in future. While they may be infrequent they could certainly derail the workings of an algorithm that trusted all social sentiment equally.

Undoubtedly there are checks and balances within its operation — it won’t take all sentiment at face value and there will presumably be a weighting behind what it learns and what it believes. This raises a further and slightly more interesting perspective — and one that I need to think more about to fully comprehend:

If an algorithm can accurately gather and interpret sentiment and enthusiasm across multiple social media platforms in relation to finance, presumably the technology can be applied to other purposes too? It could be used for shaping product offerings, designing marketing campaigns, influencing consumer behaviours and altering the nature of political campaigns and the implementation of government policies. All of these could benefit from an assessment of social media sentiment.

Heck, maybe algorithms are already doing just that?

Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

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