The BUZZ ETF is grabbing headlines right now, but this is not the first-time the industry tried to make a social media sentiment strategy happen. The last effort was closed three years after its launch having failed to convince enough investors that performance in line with the rest of the US market was worth the risk of concentration and higher fees.
Since then, though, things have changed. Social media and trading platforms have lowered the barriers to entry for small investors. What happened to GameStop in January (see below if, for some reason you have no idea) proved that a coordinated group of motivated retail investors can now move the market as effectively as any bank or hedge fund.
However, investors expecting to hold Reddit meme stocks with BUZZ ETF might be in for a surprise.
Capitalizing on the Reddit-GameStop saga
In January 2021, Reddit’s r/wallstreetbets made history. The forum, which describes itself as ‘4chan having found a Bloomberg terminal’, was the source of a social media frenzy over GameStop (GME). The coordinated action of thousands of investors pushed the price of the stock up. This rise came against seemingly all odds and caused huge losses for the hedge funds and banks that had shorted the stock.
This popular movement challenged the established order of the stock market. Small investors flows could not be considered ‘uninformed’ anymore.
An ETF provider took notice of this democratization of markets. VanEck saw an opportunity to capitalize on the saga and resuscitated the BUZZ ETF. The fund marketing promises to “unlock the power of social media”. It looks to provide passive investors an opportunity to hold companies that are trending on platforms like Reddit or Twitter. But investors might be disappointed when they realize the exposure is not quite as meme worthy as they think.
Not a Reddit meme stock ETF
VanEck’s exchange traded fund is passive, meaning it is tracking an index. This index actually existed long before the GameStop saga. Known as the BUZZ NextGen AI US Sentiment Leaders Index, the index contains 75 large cap US equities. It selects stocks that show the “most positive investor sentiment”. Sources include social networks like Reddit or Stocktwits, but also newspapers such as CNN and Reuters.
This means that the ETF holds a different basket of stocks than many investors can expect.
For starters, many might be surprised that GameStop (GME) is not part of the holdings of the BUZZ ETF at all. This might come from the relatively slow rebalancing cycle for the index. It revises holdings monthly, and so it might miss any of the hype happening in-between. Also, the index has a constraint on market capitalization. It will not consider stocks of less than $5 billion – which was GME’s case until its priced surged in January.
Beyond that, the ETF shares some similarity with broad market indices like the S&P 500 or MSCI USA.
Looking at stock selection, we find that over two thirds of the stocks in BUZZ are part of the S&P 500 index. This number goes up to three quarters for the MSCI USA index. These stocks represent most of the allocation of the ETF. This means that BUZZ has over 60% invested in stocks found in the S&P 500, and close to 80% invested in stocks found in the MSCI USA.
Beyond The BUZZ
All in all, the BUZZ ETF seems to hold US large companies in the technology sector, rather than provide a way to ride the short-lived social media fads. But all these restricting policies on the index might turn out to be in investors’ best interests as meme stocks can be subject to strong price swings – GME’s stock price is now getting whipsawed withfrenetic trading.