The CEO of the BUZZ ETF backed by Dave Portnoy breaks down the 3 strategies his social media-driven index is using to capitalize on the GameStop revolution
- Barstool Sports’ Dave Portnoy has joined BUZZ and VanEck in launching a social media sentiment ETF.
- Sentiment shown in social media and retail trader discussions could be a key to alpha – BUZZ CEO.
- These are the three strategies BUZZ is using to tap into chatter on social media.
- See more stories on Insider’s business page.
Since the start of 2021, markets have faced a new reality – the power of the retail trader.
Whether they are forcing hedge funds to back out of bets against unpopular stocks, sending shares in tiny companies up by 1,000%, or taking Bitcoin ‘to the moon’, these social-media-centered traders can move markets. January’s almost unprecedented volatility was testament to that.
But short, sharp exponential moves in shares aren’t the only thing these traders bring to the table, according to Jamie Wise, CEO of social media-tracking stock index BUZZ.
Retail traders and their posts on social media now offer an effective way to build sentiment analysis and this “might just be what alpha is; an unknown factor that we couldn’t measure, but now we can,” he said.
Alpha is the ‘active return’ a strategy brings, i.e. the market-beating ‘edge’ that a position has. To get this, BUZZ’s algorithm scrapes content from social media sites like Reddit, StockTwits and Twitter to find the most talked-about stocks. Once the data is compiled, BUZZ breaks down the sentiments -positive, negative or neutral – posters towards those companies and creates a hierarchy.
From this, investors can see the human behavior behind market moves; “the real level of fear, changing market themes, value over growth, or growth over value,” he said.
The BUZZ ETF has the endorsement of Dave Portnoy, president of Barstool Sports. “Twitter, social media, all of it is dictating stock prices,” he said in a YouTube video on March 2.
“Overall we are betting on the people in the crowds to be smarter than the suits,” Portnoy said on Twitter recently.
Despite its celebrity endorsement, BUZZ hasn’t had the easiest route. This is the second time an ETF has been launched tracking this index. In 2016, the BUZZ US Sentiment Leaders ETF (BUZ) launched, but ended up closing and liquidating by 2019, with just $8.8 million in assets.
This time VanEck a New York-based firm is managing the ETF, alongside its 57 others that run off other indices. Only time will tell if Wise is right that sentiment can indeed drive alpha.
Using the evolved sentiment analysis
This isn’t a reinvention of the wheel and sentiment analysis is nothing new, it is a collection of opinions on a stock, how investors feel about a company. But, historically it has been very hard to do, or simply expensive.
Typically, investors have only a few options available to gauge how people feel. Most rely on investor polling, but this takes time.
For sentiment on the stock market in general, they use derivative ratios, or indices such as the VIX – which measures options volatility on the S&P 500. But these are just proxies.
“At the individual level, no one ever really could measure sentiment properly,” Wise said. Asset managers would, in the past, take a “boots on the ground” approach to research and would send armies of analysts out to parking lots to count cars and interview people as they were coming out of stores, for example, he said.
“So to the extent that we can measure sentiment, I think that’s very empowering, not just for the individual investor, but for the broad institutional investor as well, who’s always cared about sentiment and couldn’t measure it,” he added.
Sentiment builds the index
At the beginning of each quarter, BUZZ scans 20 million posts a month to create a universe of stocks that have a market value of over $5 billion and that are the most-talked about in a consistent and diverse way on social media.
“We’re looking for breadth of conversation, but the conversation is very important, because then we know if it stops being talked about all the time, then the sentiment from it can provide some insight, especially if that’s something that’s changing,” Wise said.
From this, the stocks in the universe are ranked from a sentiment perspective – from highest to lowest – from which the 75 most-positive-sentiment companies are selected for the index. This then rebalances monthly, starting on March 18th – with a usual turnover of around 14-15 companies, he said.
For the algorithm, the more chatter, the better. “To me, there’s a correlation between message volume growth and outperformance, and I don’t see message volume growth starting to decline any time soon,” he said.
“We have 10 times the data now, 10 times the people online [and] it’s not that the AI is smarter. It’s just we have a bigger window into a broader community to really get a better sense of identifying stocks with collective conviction,” Wise said.
Escaping the social media echo chamber and ‘bad actors’
One criticism aimed at the retail trading phenomenon is its capacity to create an echo-chamber, which excludes a diversity of opinions and voices within these social media platforms, or for “bad actors” to take advantage of less savvy investors.
Anyone can go onto Twitter, StockTwits or r/WallStreetBets and find analysis that day traders produce to share with the community. But it can be hard to make sense of it all, especially as users likely only see a small proportion of the posted material.
But Wise says use of social media is creating a “healthy conversation,” and there is strong analysis on offer.
Through the lens of the GameStop saga, it is possible to have a more cynical view, he said, adding that investors would get a greater degree of natural protection with the exposure to large companies, which tend to be widely owned and are usually less volatile than some of the recent targets of the retail-trading army.
“We’re measuring what we think is the broad collective conviction towards a stock, knowing that it takes a lot to move these large cap stocks,” he said, adding that $5 billion market cap sector and above offers an relatable and investible index, but it also is a natural buffer or safety measure against those kinds of bad actors.”
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