VanEck is eyeing up the Reddit investing revolution with its latest exchange-traded fund. The VanEck Vectors Social Sentiment ETF [BUZZ] will track an index that scans online articles and blogs for mentions of certain equities, according to Bloomberg. The top 75 most-favourably mentioned will be included in the ETF.
“Twitter, Reddit, Stocktwits and dozens of other platforms have established communities for investors to discuss stocks. As a result of soaring online engagement they have become an alternative dataset for investors to scour and utilize for a performance edge,” Ed Lopez, VanEck’s head of ETF products said in a statement.
“Twitter, Reddit, Stocktwits and dozens of other platforms have established communities for investors to discuss stocks. As a result of soaring online engagement they have become an alternative dataset for investors to scour and utilize for a performance edge” - Ed Lopez, VanEck’s head of ETF products
What’s in the BUZZ ETF?
According to the BUZZ fund fact sheet on VanEck’s website, the ETF tracks the BUZZ NextGen AI US Sentiment Leaders Index [BUZZR]. Over the past five years, BUZZR has an average annual return of 28.14%, outpacing the S&P 500’s 16.82% gains in the same period.
Among the criteria for inclusion in BUZZR is a market cap of $5bn or more, and a three-month daily average trade volume of over 1 million. Stocks also have to show “the highest degree of positive investor sentiment and bullish perception” based on aggregated content — i.e. internet chatter — over a 12-month period.
Average annual returns of the BUZZ NextGen AI US Sentiment Leaders Index
The BUZZ ETF itself is heavily geared towards US tech stocks. 98% of its assets are listed in the country, while the information technology sector represents 23.5% of its weighting. The second biggest sector is Consumer Discretionary with a 19.7% weighting, followed by Communication Services at 18.8%, Industrials at 13.5% and Health Care at 11.2%. BUZZ’s top three holdings at the time of writing were Ford [F], Draftkings [DKNG] and Twitter [TWTR].
Is the Reddit trading revolution a fad?
Sceptics might consider this ETF something of a gimmick. After all, online discussion forums like WallStreetBets exerting significant trading influence is a relatively new phenomenon for 2021, and can create extremely volatile behaviour in the stock market. The original Reddit-backed stock GameStop [GME] saw incredible gains before it was suspended from retail trading after several institutions were burnt shorting the stock.
However, it’s a phenomenon that looks set to be part of the investment landscape for the foreseeable future.
Tancredi Cordero, CEO of Kuros Associates, told Investment Weekly that markets will see this behaviour “again and again”.
“What is different today is the network effect, which the internet and technology can provide, and is on a completely different plateau…” Cordero said. “We are going to see these kinds of things happening again because the internet isn’t going anywhere, and investors can communicate with such speed and such scale.”
“We are going to see these kinds of things happening again because the internet isn’t going anywhere, and investors can communicate with such speed and such scale” - Tancredi Cordero, CEO of Kuros Associates
A case in point is online mortgage provider Rocket Companies, which saw its share price shoot up 71% at the start of March thanks to attention from Reddit traders. Shares were then suspended due to volatility. Yahoo Finance's Ines Ferre reported that the stock had been “heavily discussed” on Reddit's WallStreetBets forum in the run up to the trading surge.
How VanEck intends to manage the inherent volatility — and therefore increased risk — in its ETF will be crucial in investors’ decision to invest or avoid the BUZZ. The fund is rebalanced monthly and is not dominated by any one stock — top holding DraftKings represents 3.33% of net assets. However, its exposure to tech stocks could present problems if the current selloff in the sector turns from a market correction into a bear market.
Should BUZZ be nimble enough to piggyback on trending stocks, then investors could benefit. However, if it misjudges the longevity of the trend, it could get burnt.