It’s 2021. A group of Redditors has inflated GameStop’s share price by 2,100% and investors have poured $280 million into BUZZ, an ETF based on social media hype.
Backed by the founder of Barstool Sports, BUZZ is currently outperforming the S&P 500.
What a time to be alive.
The market madness of early 2021 has given everyone from retail investors to the Chairman of the Fed plenty to think about. For investment firm VanEck, it highlighted a golden opportunity to resurrect a wacky idea from the mid-2010s: an ETF based not on rising price, but on hype.
The VanEck Vectors Social Sentiment ETF (BUZZ) is made up of 75 stocks chosen by their “social media sentiment,” i.e. their levels of buzz online. It’s a bit of a wild concept since investors don’t traditionally associate hashtags with a rise in share price. But if the GameStop explosion is any indication, hashtags matter now.
So how does BUZZ work? Why is it controversial? And why are ETFs in general considered a better long-term investment than individual stocks?
Let’s investigate BUZZ.
What makes BUZZ such a unique ETF?
On paper, BUZZ looks like a pretty normal ETF. It consists of a healthy number of stocks (75) including many blue chips like Ford, Tesla, and Twitter. Plus, it has a high bar for entry: all stocks in BUZZ must have a market cap of at least $5 billion, so no volatile newcomers are welcome here.
If BUZZ’s appearance seems normal, it’s the way these stocks were chosen that’s so fascinating.
How ETFs are (typically) built
ETFs have themes that link the underlying securities together. The first ETF, built in 1993, was SPY, and was launched to reflect the overall performance of the S&P 500. An investment in SPY, therefore, is like an investment in the S&P 500 index itself.
Today, there are over 7,600 ETFs bundling commodities like gold or oil, sectors like IT and healthcare, and emerging markets like Africa and India.
While ETF themes can range from the obvious to the creative, all ETF managers follow one basic principle: to build a fund that will increase in value over time. Case in point, you can’t just make up an ETF and get it listed – you have to get it approved by the SEC and sell your underlying logic to investors.
That’s what makes BUZZ so unique and controversial: some investors think it’s based on nothing at all.
How BUZZ was built, and why it’s getting mixed reactions
The Van Eck Vectors Social Sentiment ETF (BUZZ) gets its 75 stocks from an algorithm called the Buzz NextGen AI U.S. Sentiment Leaders Index, which identifies companies getting “bullish social media sentiment.”
In short, it picks stocks based on rising popularity, not price.
Many investors aren’t too keen on BUZZ because they struggle to link social media mentions with share price. Earnings, growth potential, demand… these are factors that should indicate a rise in share price.
But Reddit mentions? Really?
Case in point, BUZZ isn’t the first hype-based ETF. The Sprott Buzz Social Media Insights ETF (BUZ) launched alongside the aforementioned AI index in 2015. But most agree that BUZ was just too ahead of its time. Due to a lack of investor interest, it closed.
Does that mean the naysayers are right? That social media mentions are a terrible predictor of a rise in share price?
Well, if BUZ had stayed open, it would’ve outperformed the S&P 500 in four of the last five calendar years.
BUZZ is not a “meme stock” ETF
Some in the media are quick to label BUZZ a “meme stock ETF” full of stocks that saw skyrocketing share prices thanks to the subreddit r/WallStreetBets. However, the two most notorious meme stocks, GameStop and AMC, are nowhere to be seen on BUZZ.
“This is not a Reddit meme stock ETF” says BUZZ originator Jamie Wise, as quoted in CNBC.
While GameStop and AMC support the logic behind BUZZ, that hype can drive share price, both stocks were way too extreme to be included. Among other reasons, they weren’t mentioned in enough places for a long enough period of time.
BUZZ isn’t trying to predict memes, but rather, find companies that might see a tick in share price due to positive social media sentiment. Hedge funds have been monitoring social media for years, but BUZZ represents the first time this intel is being shared with the people.
If learning about BUZZ has piqued your interest in ETF investing, here’s a quick refresher of the basics, and why, according to the experts, ETFs are often considered a better long-term investment than individual securities.
What is an ETF?
An ETF, or Exchange Traded Fund, is like a bundle of investments that you can buy and sell on an exchange. To illustrate, you can buy shares of BUZZ right now on Webull – for example – just like you’d buy shares of TSLA or GOOGL.
An ETF can include a mix of individual stocks, commodities, bonds, and other securities. And unlike mutual funds, ETFs can be traded all day, so their share prices constantly fluctuate.
ETFs offer a convenient way to invest in a broader concept, commodity, or even an entire sector
Let’s say you want to invest in the clean energy sector. You could go buy, say, 88 individual company stocks. It’ll just take hundreds of hours of research, 88 trades, and fees, and leave you with 88 tickers to track in your portfolio.
Or, you could just invest in a single clean energy ETF. That way, the research is already done for you, you make one trade, and you only have a single ticker to track in your brokerage app of choice.
ETFs have lower expense ratios
Expense ratios are a funds management costs, which are typically taken out of the fund’s assets.
Generally speaking, ETFs are passively managed and have significantly fewer operating expenses than something actively managed like a mutual fund. This means that ETF managers can afford to charge shareholders like you fewer fees (if any).
ETFs are more diverse and stable than individual securities
Because they represent bundles of securities, ETFs are naturally more diverse and stable than individual stocks. If the market is like a big, wide ocean, ETFs are like cargo ships. Sure, they can be a little slow, but they’re resilient to crashing waves and the occasional hurricane.
If you invest in a single stock and it tanks, you’re out of luck. But if you invest in a sector ETF and just one out of 108 stocks tanks, your investment will barely be affected. In fact, you might not even notice as the share price continues to rise with sector performance.
ETFs don’t always go up, of course, but their inherent diversity makes them a superior long-term investment than most individual securities.
BUZZ’s hype-based indexing logic is certainly avant-garde, but it still follows a traditional ETF philosophy: to provide a diverse, convenient, and stable pathway to long-term growth for investors.
Whether or not this ETF will continue to perform remains to be seen, and only time will tell!