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Everything You Need to Know About the BUZZ ETF

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What You Need to Know

  • The BUZZ ETF leverages public opinion to build its portfolio.
  • Social media users can manipulate stock prices, and herd mentality investing can lead to price bubbles.
  • While BUZZ has said will not rely on meme stocks, such as GameStop or AMC, it has invested in both.

Public opinion means more than ever in the world of investing, and the BUZZ exchange-traded fund (more formally known as the VanEck Vectors Social Sentiment ETF) specifically leverages public opinion to build its portfolio. If a large-cap stock is playing heavily on social media platforms, and the overall public sentiment for the stock is generally positive, it will find its way into BUZZ’s holdings. 

Is public perception an effective tool for identifying potential gains in the market? Over the past five years, the performance of BUZZ’s underlying index consistently exceeded the S&P 500 by a few points, although recent performance has been disappointing. Will this trend continue? Only time will tell.

The Philosophy Behind the BUZZ ETF

ETFs as a class have exploded in popularity, as investors looked for a simple, lost-cost way to take advantage of long-term market gains. The combined value of all ETFs reached over $7 trillion last year. 

Over the first half of 2021 alone, investors added $476 billion to the total assets of ETFs. Using passive management and tracking indexes, ETFs keep fees low and provide investors with low barriers to entry, adding to their popularity. And with ETFs following a wide variety of indexes across industries and sectors, they offer something for every investor.

The BUZZ exchange-traded fund (BUZZ ETF), launched in March 2021, follows the VanEck NextGen AI US Sentiment Leaders Index (BUZZTR). BUZZTR uses artificial intelligence to gauge public sentiment about companies, specifically by reviewing online sources such as social media posts, blog posts and online news media. BUZZ calls its process investment based on “collective conviction.”

BUZZ has a three-step stock selection process. First, it identifies the stocks receiving the most attention online, based on the number of posts. It then attempts to determine whether the posts indicate predominantly positive or negative sentiment about the stock. Finally, it selects the 75 large-cap stocks with the highest overall positive sentiment. BUZZ rebalances holdings monthly.

Early on, BUZZ received a significant celebrity endorsement from Dave Portnoy, the founder of Barstool Sports, a popular sports and pop culture blog. BUZZ grew quickly, reaching over $500 million in assets under management within two weeks of its launch. At its peak, it was the sixth fastest-growing ETF over the same time frame. But BUZZ just as quickly fell back to Earth, losing about half of its total assets. Now, with around $220 million in managed assets, BUZZ represents a small fraction of the nearly $8 trillion invested in ETFs.

The Effects of Social Media on Investing

From a high-level perspective, BUZZ’s philosophy is sound: If more people have positive sentiments about a stock and widely spread that sentiment, prices should go up accordingly. And there is no question that social media does have a demonstrable effect on stock prices.

But there are two problems with this generalization. The first is that social media users can manipulate stock prices, giving favorable treatment to stocks that do not have the financial fundamentals to support their valuation. And this can lead to or exacerbate the second problem namely, price bubbles created by herd mentality investing.

The past year has been a master class in market manipulation through social media, with the Reddit-based escalation of GameStop being the prime example. Looking to punish professional investors profiting from shorting stocks, a Reddit investment group intentionally decided to drive up the price of GameStop (GME). 

Despite GameStop’s precarious financial situation, the Reddit group drove GME stock from $17 to $347 per share in January. And even once the situation became highly public, the stock price remained high. GME’s price of over $180 still far exceeds any reasonable valuation. Similar events are now occurring through other social media platforms such as TikTok.

Portnoy has said the fund wouldn’t chase meme stocks, like GME or AMC Theatres (AMC), or try to manipulate the market. Yet the July 2021 rebalancing included the addition of AMC. BUZZ also has 2.94% of its holdings invested in GameStop, close to the 3% maximum allowed under the ETF’s investment policies. In fact. GameStop is one of the top 10 stocks in the BUZZ ETF.

BUZZ states that it relies on the “wisdom of the crowd,” but frequently, there is little actual wisdom in herd mentality positions. Instead, herd investment mentality can lead to disaster, as has been true ever since the Dutch tulip investment bubble in the 17th century.

Does the BUZZ Algorithm Work?

There is little information on the inner workings of the BUZZ selection algorithm other than a few minimum qualifications. Specifically, to be eligible for inclusion in the BUZZ ETF, stocks must have a minimum market capitalization of $5 billion. They must also have a three-month minimum daily average trading volume of $1 million. But how BUZZ determines the number of mentions for a stock and whether mentions are positive or negative remains proprietary.

The stocks in the BUZZ ETF cover a wide range of sectors and industries, although the information technology and consumer discretionary sectors account for more than half of BUZZ’s holdings. Sector allocations have already changed significantly in the few months since the fund’s inception, and will continue to vary as news cycles change. 

Numerous questions persist about the validity of the BUZZ selection algorithm, and a quick review of the current portfolio shows why. 

While it is easy to understand a selection like Virgin Galactic (SPCE) given the recent race to space between Virgin founder Richard Branson and his fellow billionaire Jeff Bezos, stocks such as Peloton (PTON) and Exxon (XOM) are more difficult to explain.

In recent months, a large part of Peloton’s press coverage involved the recall of Peloton treadmills due to children being trapped under them, with one child dying from their injuries. Peloton’s stock value has dropped 24% since January, and securities litigation firms are actively seeking investors to participate in class-action suits against the company due to the loss of share value.

Similarly, companies such as Exxon (XOM) that rely on the exploitation of fossil fuels are far from public darlings, particularly given the intense focus on climate change. Indeed, two major shareholders recently helped drive a proxy battle that resulted in the replacement of two members of Exxon’s board, all in response to perceptions of a weak response to climate change problems. While perhaps the addition of more environmentally conscious directors is positive, it is hard to view the overall press regarding the event as such.

The validity of BUZZ’s investment philosophy versus those of other indexes is also an open question. Although the underlying index has outperformed the market over the past five years, BUZZ currently lags the S&P 500 by about 5 points. 

The Future of BUZZ

Will BUZZ be successful in the long run? Perhaps. The evidence is certainly there to support the effect of social media on stock price. And as BUZZ continues to improve its proprietary algorithm, it may correspondingly improve its own public perception, thereby generating additional investment dollars. Or it may just run off the herd investing cliff. 

Pictured: Dave Portnoy. (Photo: Bloomberg)