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.
