There’s a new exchange-traded fund (ETF) in town.
One that uses sources like social media, news articles and blog posts to identify and invest in the stocks getting hyped up online.
Launched earlier this month, The VanEck Vectors Social Sentiment ETF (NYSE:BUZZ) aims to track the performance of 75 large cap US stocks with “the highest degree of positive investor sentiment and bullish perception”.
It’s a novel approach but it’s not the first of its kind. The Buzz NextGen AI US Sentiment Leaders Index behind it initially spawned a similar product in 2016 but the Sprott Buzz Social Media Insights ETF ran out of steam by March 2019.
BUZZ doesn’t provide the documents the UK regulator needs so, like a lot of US-based ETFs, it’s not able to attract investors on this side of the Atlantic.
But is that really a problem? The main draw of pooled investment funds is normally that they can do something you can’t. A quick look at the top names in BUZZ tells us you could probably do the bulk of the work yourself.
As of 15 March 2021, these are the top BUZZ holdings and they’re all on Freetrade.
You can see the full list here.
So if you really wanted to, you could work to replicate the portfolio in your own account. You probably won’t be able to rebalance in line with the fund itself, but if you’re looking for access to the holdings, it’s one way to make it work.
This isn’t personal investment advice, these examples are just illustrations so they shouldn’t be read as recommendations in any shape or form. You should always do your own investment research or seek independent financial advice if you need to.
Away from the novelty, there are a few bigger questions to ask around the BUZZ ETF.
First, and most important - is this actually a good way to invest?
Hype is one thing but what about the state of the underlying companies’ balance sheets? Admittedly that’s not as catchy a proposition but considering buying into companies on the back of water-cooler chat needs a bit more substance eventually.
Not to mention the wisdom of crowds can turn into the madness of the masses overnight. In that sense, the core appeal could actually end up being the biggest risk here.
We are primed to only seek out information that proves us right. This confirmation bias is normally something we try to avoid in investing but a crude interpretation of the BUZZ ETF might be that it’s designed to identify the hyped-up themes and pour on more hype by investing in them.
That means it could have the feeling of a product that would have unflinchingly pumped money into internet stocks at the height of the dot.com bubble.
Identifying a prospective addition to your portfolio can actually be the more straightforward part compared to the buying and selling of the stock.
Professional investment teams often spend their time whittling down every company in their sector into a shortlist of firms they deem good enough to possibly make it into their fund.
Then it’s a waiting game. These investors will quite happily wait until those good companies begin to look like good value too.
The March dips this time last year are a key example of an entry point that allowed a lot of investors to buy into their favourite companies at knock-down prices.
So, two investors could end up with very different results in the same stock, purely on whether they bought in before it blew up, or at the peak of its popularity.
It seems simple to say but you tend to find out who the good investors are by what they do during the life of their investment, not at the buying or selling stage. The investors profiled in Lee Freeman-Shor’s book The Art of Execution are great examples of this.
The BUZZ ETF doesn’t allow for that valuation sensitivity. And that might not actually be a problem for some people. ETFs aren’t really expected to act in that way anyway.
In fact, investors have piled money into passive vehicles and away from actively managed funds in recent years both because of cost and the unreliability of active managers to outperform their index.
But that was before the boom in thematic or smart-beta ETFs when all most investors wanted was a cheap alternative to open-ended funds tracking basic indices like the FTSE All Share and S&P 500.
Now ETFs like BUZZ have more than just a guiding hand in their aims. They construct their own indices and the portfolio is managed in line with that. Another change is that costs are rising. The BUZZ ETF is 0.75%, not actually that far from what active managers in open-ended investment companies (OEICs) are charging now.
The fact that an ETF based on market FOMO is in the works too tells us the changes aren’t finished either. In fact, the popularity of thematic investing looks like it has the potential to replace the bottom-up stock picking investors are so wary of these days.
There are definite attractions to thematic ETFs. Being able to follow long-term trends and top-down ideas fulfilled by a broad basket of connected stocks is a key one. But how many themes can you hold before you’re not really holding a theme at all, and instead you’re just replicating a broader index?
This is where it can make sense to consider a core and satellite approach when it comes to investing in ETFs.
This process uses cheap, international index-tracking ETFs as the basic building blocks of your portfolio but leaves enough room to let you explore themes or individual companies on the periphery too.
That means your overall portfolio isn’t tied to one theme in particular but still has exposure to these ideas while paying attention to risk and cost.
And, as the thematic ETF world inevitably grows, it will be even more important to use them sensibly rather than piling into an idea that may or may not prove successful over time.