By Ed Lopez, Head of ETF Product
The days leading up to the launch of the VanEck Vectors® Social Sentiment ETF (BUZZ) have been an experience I won’t forget. Have you heard of our new ETF? If your clients are on social media, they probably have. There’s been a lot of buzz around it (pun intended). However, I want to shift the focus and discuss why an advisor would consider BUZZ for their clients.
I have done numerous media interviews ahead of the launch to help reporters understand the methodology of the underlying index and a concept that—if taken at face value—may cause skepticism among traditional financial professionals. Let individual investors pick the stocks? In a sense, yes, that’s what BUZZ does.
Stock Picks Powered by the Sentiment of Millions of Online Interactions
Online platforms have become destinations for discussions about anything and everything, including stocks. What if you could read every single post about a stock on platforms like Twitter, Stocktwits, Reddit and a handful of others, add up all the positive, neutral and negative sentiment posts across platforms and see which way “the wind was blowing”? Would that be valuable insight to know when deciding whether to invest in a stock? Professional investors think so.
Sentiment is not a new concept in financial markets. Traditionally, sentiment has been measured by changes to the price levels of a stock. Today, millions of posts are shared each day on social platforms—posts from people across the country, each offering their own views and perspectives. Technology enables the aggregation of millions of posts and the identification of collective sentiment about a stock, perhaps even before it is reflected in its price.
I will direct you to other posts and information about the methodology and bring this back to the focus of this piece. In one of my recent interviews, I was asked if VanEck is positioning BUZZ for individual investors or financial professionals.
Three Reasons to Consider Investing in BUZZ for Clients
With every ETF launch, we have to make a bit of a judgement about who the idea might resonate with the most in order to direct resources appropriately. For BUZZ, no matter how much we believed in the soundness of the methodology from an institutional level, we had to acknowledge the fact that trying to sell it to the traditional financial professional might be like banging our heads against a brick wall. Sure, there might be adopters among professionals, but we figured that we might actually find more adoption among individual investors. However, a funny thing happened: we have received many calls from financial advisors.
Many of the financial advisors calling in have admitted they are calling because their millennial clients have asked about BUZZ. Advisors are smart to want to learn more, but it got me thinking about reasons why advisors might want to consider this strategy:
- Millennials: They understand the new digital world we are in, and they’re comfortable with sharing photos, personal moments and ideas online. Like the advisors calling in, it may make good business sense to explore an idea that may resonate with millennial investors, particularly if the strategy is sound. Being open to BUZZ is a great way to stay relevant with younger clients. If you are a millennial advisor, you likely already understand this.
- Staying focused on the bigger plan: Keeping clients on plan is tough. Stock trading has always been something that elicits excitement, particularly when markets are good. People want the hot stock tip and are prone to getting excited about stock stories. BUZZ trades the trends as informed by the index’s rules for stock selection— the index tracks the 75 large cap U.S. stocks that exhibit the most bullish investor sentiment based on content aggregated from online sources. It’s not driven by whims, but strong collective conviction. As an advisor, you’ll have new stock stories to talk about each month, and your client doesn’t have to trade in and out of stocks, potentially incurring taxes and subjecting themselves to their own human emotions and biases. That said, the high turnover strategy of the index, even in an ETF, may have the potential to incur taxable capital gains, but the ETF structure is far better for this kind of strategy than a mutual fund wrapper or trading individual stocks.
- Investing by social sentiment may actually be a pretty smart thing to do: Professional investors have been tapping into this type of alternative data for a while. Research has highlighted the potential predictive power of sentiment. The BUZZ NextGen AI US Sentiment Leaders Index (BUZZTR), which BUZZ seeks to track, has a five-year live history that appears to show this as well. Don’t look at just the cumulative line chart. Look at trailing returns, calendar returns, batting average and—my favorite for this strategy—the upside/downside capture ratio. Over the last five years, the index experienced an upside capture ratio of 131 versus the S&P 500. This means it captured 31% more return in up markets. Its downside capture ratio of just 99.72 means it experienced approximately the same amount of return in down markets as the S&P 500, maybe performing just a hair better. This speaks to the rules behind the index’s stock picking. Beyond the high flying growth stocks you might imagine, some contrarian value stock plays enter the index, too.
BUZZ Demonstrates the Power of Collective Conviction
| Index Risk Statistics: 8/1/2016 – 12/31/2020 (Monthly Frequency) | ||||||||
| Ann. Return | Annualized Standard Deviation | Sharpe Ratio | Max Drawdown | Upside Capture | Downside Capture | Beta | Correlation | |
| BUZZ NextGen AI US Sentiment Leaders Index | 25.81 | 20.92 | 1.14 | -18.35 | 130.93 | 99.72 | 1.25 | 0.94 |
| S&P 500 Index | 15.45 | 15.68 | 0.91 | -19.60 | 100.00 | 100.00 | 1.00 | 1.00 |
| Index Calendar Returns (%): As of 12/31/2020 | ||||||
| 2017 | 2018 | 2019 | 2020 | |||
| BUZZ NextGen AI US Sentiment Leaders Index | 22.59 | -0.41 | 36.16 | 58.65 | ||
| S&P 500 Index | 21.83 | -4.38 | 31.49 | 18.40 | ||
Source: Morningstar, FactSet. Data as of 12/31/2020. Performance data quoted represents past performance. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. Indices are not securities in which investments can be made. Prior to 3/2/2021, the VanEck Vectors Social Sentiment ETF had no operating history. For fund performance current to the most recent month-end, visit vaneck.com.
Investing in social sentiment is a fascinating topic given the growth of social media platforms and the rise of modern technology like artificial intelligence and natural language processing. For an easy introduction, listen to the podcast I hosted with Jamie Wise, CEO of Periscope Capital and Founder of Buzz Holdings, the creator of the BUZZ NextGen AI US Social Sentiment Leaders Index: Trends with Benefits #46: Social Sentiment with Jamie Wise.
Originally published by VanEck, 3/15/21
DISCLOSURE
Calendar returns refers to the percentage gained or lost at the end of the calendar year per dollar invested on January 1.
Batting average is measured by dividing the number of periods a portfolio or investment strategy outperforms a benchmark by the total number of periods.
Upside/downside capture ratio measures an index’s performance in up/down markets relative to the market (benchmark) itself. It is calculated by taking the index’s performance in periods when the market (benchmark) goes up/down and dividing it by the benchmark’s upside/downside return.
Annualized return is the average amount of money earned each year by an investment over a given time period.
Standard Deviation is a statistical measurement of dispersion about an average, which depicts how widely the returns varied over a certain period of time.
Sharpe is a measure of risk-adjusted returns. It indicates the average return minus the risk-free return divided by the standard deviation of return on an investment.
Max drawdown is the maximum loss from peak to trough of a portfolio before a new peak.
Upside and downside capture measures a fund’s historical performance relative to its benchmark during times of market strength/positive returns and market weakness/negative returns.
Beta is a measure of security’s or portfolio’s volatility compared to the broader market.
Correlation is a statistic that measures the degree to which two entities move in relation to each other.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in the ETF, please click here or visit vaneck.com.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
BUZZ NextGen AI US Sentiment Leaders Index (the “BUZZ Index”) is a product of BUZZ Holdings ULC (“BUZZ Holdings”), and has been licensed to Van Eck Associates Corporation for use in connection with the VanEck Vectors Social Sentiment ETF.
“BUZZ” is a trademark of BUZZ Holdings, which has been licensed by Van Eck Associates Corporation for use in connection with the BUZZ Index.
VanEck Vectors Social Sentiment ETF is not sponsored, endorsed, sold or promoted by BUZZ Holdings, or its shareholders, or the licensor of the BUZZ Index and/or its affiliates and third party licensors. BUZZ Holdings makes no representation or warranty, express or implied, to the owners of the VanEck Vectors Social Sentiment ETF or any member of the public regarding the advisability of investing in securities generally or in VanEck Vectors Social Sentiment ETF, particularly or the ability of the BUZZ Index to track general market performance.
BUZZ Holdings’ only relationship to Van Eck Associates Corporation with respect to the BUZZ Index is the licensing of the BUZZ Index and certain trademarks of BUZZ Holdings. The BUZZ Holdings are determined and composed by BUZZ Holdings without regard to Van Eck Associates Corporation or the VanEck Vectors Social Sentiment ETF. BUZZ Holdings has no obligation to take the needs of Van Eck Associates Corporation or the owners of VanEck Vectors Social Sentiment ETF into consideration in determining and composing the BUZZ Index.
BUZZ Holdings are not responsible for and have not participated in the determination of the prices of VanEck Vectors Social Sentiment ETF or the timing of the issuance or sale of securities of VanEck Vectors Social Sentiment ETF or in the determination or calculation of the equation by which VanEck Vectors Social Sentiment ETF securities may be converted into cash, surrendered, or redeemed, as the case may be. BUZZ Holdings have no obligation or liability in connection with the administration, marketing or trading of VanEck Vectors Social Sentiment ETF. There is no assurance that investment products based on the BUZZ Index will accurately track index performance or provide positive investment returns. BUZZ Holdings is not an investment advisor and the inclusion of a security in the BUZZ Index is not a recommendation by BUZZ Holdings to buy, sell, or hold such security, nor should it be considered investment advice.
BUZZ HOLDINGS DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE BUZZ INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION WITH RESPECT THERETO, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS). BUZZ HOLDINGS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. BUZZ HOLDINGS MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY Van Eck Associates Corporation, OWNERS OF THE VanEck Vectors Social Sentiment ETF, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BUZZ INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL BUZZ HOLDINGS BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN BUZZ HOLDINGS AND Van Eck Associates Corporation, OTHER THAN THE LICENSORS OF BUZZ HOLDINGS.
Effective August 18, 2016, BUZZ Indexes Inc. implemented changes to the BUZZ NextGen AI US Sentiment Leaders Index construction rules. The index constituent count was increased from 25 to 75 stocks and the maximum constituent weight was reduce from 15% to 3%. These change may result in more a diversified exposure to index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
An investment in the VanEck Vectors Social Sentiment ETF (BUZZ) may be subject to risks which include, among others, risks related to social media analytics, investing in equity securities, medium-capitalization companies, information technology, communication services, consumer discretionary, health care and industrials sectors, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund’s investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs carefully before investing.
