VanEck Vectors Social Sentiment ETF (BUZZ) has enlisted Barstool Sports CEO Dave Portnoy to put his face behind their algorithmically driven ETF.
Enlisting Portnoy, also known as El Presidente, will certainly generate a lot of buzz for their ETF, but the idea behind this ETF should give investors some pause. The ETF will consist of the top 75 large-cap stocks which received the most positive chatter online, which will be determined by their AI algorithm, and the index will rebalance monthly.
After the explosion of GameStop’s (GME) stock price due to retail investors on the subreddit r/WallStreetBets getting behind it, everyone wants to get in on the next meme stock before it blows up. But this ETF wouldn’t have been able to ride the GameStop rocket to the moon, and it’s more likely to leave you with paper hand than diamond ones.
The first problem with this idea for an ETF is the fact it rebalances monthly. If the idea is to get in on the ground floor before the next GameStop blows up, rebalancing monthly is just too slow. If, after tracking positive sentiment on GME in January, the AI suggested buying GME at the start of February they would have lost a lot of money. In fact, they would have lost more than half their investment on the first day. A monthly rebalancing is too long a time frame in which to measure the fickle sentiments of social media.
The second problem is the idea behind the AI doesn’t make sense. If it is tracking just positive sentiment, not a mixture of positive and negative sentiment, it will just be the 75 most talked-about stocks. But if they track positive sentiment and weigh it against negative sentiment, the backlash to meme stocks will drown out the positive chatter it’s trying to pick up on. So either way, it won’t work.
The third problem is this algorithm is going to be really easy for companies to game. Portnoy claims social media is dictating stock prices, but it’s still investors and real people putting their money into stocks that is dictating prices, even if they are picking stocks based on dank memes. But if the BUZZ algorithm just picks up on positive sentiment it could easily be manipulated by bots flooding social media with fake positive sentiment for a stock they want the ETF to buy.
Generally, I would avoid taking financial advice from a guy who lost $700,000 on GameStop. And I would not trust a guy who claims he’s going to eat $2 million in losses rather than selling and sells anyways.