2023-05-01 01:25:05 ET
Summary
- The fundamental idea behind BUZZ is that it tracks online interactions around large-cap stocks and weights according to positive investor sentiment.
- In a momentum-driven market, this might be fine, and it indeed tracks the momentum factor closely, but when it really counts as an active investor it is mediocre.
- Moreover, the strategy generates a lot of fees. We really don't see the point of using sentiment analysis for large-cap stocks either.
- If it were in small-cap you'd maybe at least get ahead of some meme stock trends which could appeal to some investors.
The VanEck Social Sentiment ETF ( BUZZ ) is not an ETF we like. We have some fundamental issues with the concept, specifically with the large-cap focus interacting with the matter of sentiment analysis on online interactions, but we also think that it has failed when it has mattered empirically. Most importantly, a strategy based on sentiment analysis and reweighting generates more costs, and the higher expense ratios are a testament to that. Overall, we think that a momentum-correlated ETF like BUZZ is poorly suited for the current environment, and we'd not take BUZZ even if we did think a momentum factor made sense. A pass.
Explaining BUZZ
Normally we'd break down the portfolio, but BUZZ reweights fairly frequently so its current holdings are not going to be that useful to look at. What is important is that BUZZ tracks a large-cap index with about 75 large-cap stocks in it that respond to sentiment analysis conducted on public, online interactions.
Sentiment analysis is a natural language processing approach where statistics are used to associate the occurrence of certain language with the presence of a positive or negative sentiment about a topic. The BUZZ will be weighted towards large-cap stocks in the US where there appears to be a positive sentiment by the markets.
Inception was in 2021, so the YTD performance has been more than -20% in declines, but it has been back-tested.
While in back-tested periods the strategy seems to do somewhat well, it performs poorly now. This is because BUZZ also is highly correlated with tech issues, captured by correlations to trackers of the NASDAQ exchange, but also ETFs that explicitly track the momentum factor in markets. Those used to perform better.
The current market, which does not favour momentum and requires more active investing, has not demonstrated much outperformance, and likewise BUZZ is not doing particularly well. The strategy of frequent reweighting also generates a lot of costs and the expense ratio is 1.16%, which is very high.
Bottom Line
We don't see the value in sentiment analysis among large-cap stocks. There's no value in following the crowd unless there's an outsized scope for retail investors, who'd be the ones publicly discussing their books, to catalyse price movements like in meme stocks. An ETF that tracked a portfolio of sentiment-analysed stocks in the small-cap space might be more interesting, but there isn't an edge, perhaps the opposite in fact, in following the crowd.
More technically however, the moment is poor for ETFs that are guided by momentum. We do not believe the current markets can gather momentum when there are a host of geopolitical risks on the horizon, as well as risks related to the economy. Banking is still a question mark on the regional side, and the credit conditions could become substantially worse which would have a multiplied impact on the broader, credit-addicted US economy.
With momentum being unattractive, but also expenses high on this ETF to guarantee a certain degree of loss to investors, the hurdle is high to get any outperformance from this ETF. For the foreseeable future, where the markets are rife with unknowns, BUZZ is not a strategic play at all.
For further details see:
BUZZ: Not Convinced By Failure To Outperform In Tougher Environment