Since its launch at the beginning of March, the VanEck Vectors Social Sentiment ETF (NYSEARCA:BUZZ) has attracted more than its share of enthusiasm. Inflows into the BUZZ ETF (exchange-traded fund) have simply been huge.
In fact, BUZZ attracted more than $280 million in capital right out of the gate. As of Mar. 17, according to VanEck itself, the fund had grown to some $500 million in just two weeks.
But this exchange-traded fund should attract some skepticism as well. A fund based on social media and blog posts simply isn’t suited for long-term returns. Admittedly, BUZZ isn’t quite as out there as it sounds, but investors still can do far better.
Understanding the BUZZ ETF
Of course, the idea of an ETF using an algorithm to chase stocks that are trending on social media seems ridiculous. And that’s particularly true after two months of historically volatile trading in “meme stocks.” Many of those meme stocks had little business rallying and now look set to plunge at some point.
But that’s not exactly how the BUZZ ETF works. The fund holds only stocks with a market capitalization of $5 billion or higher. That excludes some (though not all) of the Reddit favorites that went wild back in late January.
Moreover, the index on which the ETF is based rebalances monthly. So, the fund isn’t instantly chasing stocks that soar solely based on Internet chatter.
And, while the fund is new, the underlying index — the BUZZ NextGen AI US Sentiment Leaders Index — is not. That index has done quite well in recent years. As of Mar. 19, it has rallied about 140% over the past year and about 25% annualized over the last five.
Finally, the index’s 75 holdings include some solid names. In fact, I’ve personally recommended more than a few. So, the BUZZ ETF is more than just an algorithm-driven method of jumping in on day-trader rallies.
Does BUZZ Work Going Forward?
Of course, that alone isn’t enough, though. So, while the BUZZ ETF might be more logical than it appears at first glance, it’s still not a good option for long-term investors.
One of the reasons why is that the index’s outperformance is relatively concentrated. From late 2015 to March 2020 lows, the index essentially matched the market.
In fact, had the BUZZ ETF been around for that stretch, investors in the fund would have underperformed. Annual expenses total 75 basis points (0.75%) of assets, a rather high figure. Plus, that seems particularly high in a world where broader index funds have expenses as low as 1.5 basis points.
BUZZ took off from the March 2020 lows. And, as the index provider itself notes, so did the activity used to pick the stocks.
But, of course, that’s not necessarily a surprise. Pick the hottest stocks in a roaring bull market partly driven by retail investors and you’re likely to outperform. What happens when the environment changes, as it inevitably will?
The obvious problem here is correlation versus causation. The stocks in the index over the past 12 months generally have done better than the market. Is that because investors are talking about those stocks on social media? Or are investors talking about those stocks on social media because they’re doing well?
Not Quite Good Enough
My issue here is simple: I don’t believe investors should be paying 75 basis points to let social-media traders pick stocks for them.
Yes, the index underlying the BUZZ ETF has outperformed. But, as the common investing disclaimer goes, past performance does not guarantee future results. Given portfolio construction, we don’t know why the index has outperformed.
VanEck would argue that the outperformance has come from investor sentiment accurately predicting price. And there are other equally logical explanations.
Social-media traders could well like riskier stocks. Riskier stocks are precisely those that do well when the market roars. With the S&P 500 up an incredible 63% over the past year, this certainly qualifies as a roaring market.
More broadly, the BUZZ ETF seems somewhat stuck in the middle. There’s nothing wrong with using low-cost index funds to capture the market’s long-term upside. There’s also value in putting in the work, doing quality due diligence to find undervalued companies and big-time growth opportunities.
But paying 75 basis points a year to let social-media traders pick your investments? That’s not a winning strategy.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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