Last month, an outside-the-box-thinking ETF, the CrowdInvest Wisdom (WIZE), closed after five months, which may be the shortest life span of an exchange-traded fund in history.
WIZE tracked the CrowdInvest Wisdom Index, which comprised U.S.-listed securities selected and weighted according to the results of a public poll taken through the CrowdInvest Internet Platform mobile application.
Here’s the gist of how it worked: Registered-app users voted on which stocks were included in the index by predicting whether a given security would increase or decrease in value. The stocks were then ranked by the net percentage of increase votes, with the top 35 securities being included in the index.
The failure of WIZE could have been simply because the user participation wasn’t there since it was tied to an app that needed registered users. Having only $2.5 million in assets is not unusual for a five-month-old fund, but that could’ve been a contributing issue as well.
Another sort-of-similar ETF launched this year: The Sprott Buzz Social Media Insights (BUZ), came out a week before WIZE in April. BUZ tracks an index composed of 75 U.S.-listed companies selected according to the number of positive “sentiments” received from various internet and social networks.
Instead of a process centered on investor voting, this one relies more on an algo that scrubs social media and the internet for which stocks are being talked about, and which stocks have a positive buzz about them.
There are other “crowd” funds with much more shallow polling pools, like those that track the 13F filings of hedge funds and replicate those holdings, such as the Global X Guru Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA). Or even those like the Direxion All Cap Insider Sentiment Shares (KNOW) and the Guggenheim Insider Sentiment ETF (NFO), which select stocks by trading in a company stock by company insiders, coupled with other factors such earnings estimates.
But what all of these ETFs have in common is that they are trying to measure public sentiment about certain stocks, which, really, is not that novel at all. They sound like they are reinventing the wheel in the 21st century with a tech-savvy spin, but the idea of buying stocks based on market sentiment is as old as investing itself.
Here’s The Best Crowdsourcing Tool
If you ignore the bells and whistles of these newer strategies, it’s a broad market index such as the S&P 500 that, it could be argued, is the best crowdsourcing tool for the deepest and most vested source of stock sentiment. Really.
Granted, these newfangled “crowdsourcing” ETFs may not have wanted the deepest and most vested sentiment about stocks. Replicating hedge funds by following the supposed smartest investor in the world certainly will produce some contrarian investment strategies that may work. Or not.
And even monitoring social media like Twitter has produced market-moving moments, such as in 2013 when a fake Associated Press tweet about explosions in the White House and President Obama being injured trigged the Dow to lose 100 points in two minutes, before bouncing back to the pre-tweet level just three minutes later.
But reliability is a consideration, and following hedge fund public filings is following moves made months ago that may no longer be current at the time of the 13F filing’s release. And the folly of making market moves based on tweets was clearly evident with the fake AP tweet.
Broadest Crowdsourcing Sentiment
If the idea behind crowdsourcing ETFs is merely trying to understand what everybody's doing, what everybody's buying and the right price for that, then there's nothing better than a market index like the S&P 500. The popular benchmark offers the broadest possible scope with the most information.
A fund based on the index, like the SPDR S&P 500 ETF Trust (SPY), the Vanguard S&P 500 Index Fund (VOO) or what is now the cheapest of the three when it comes to expense ratios at a barely registering 0.04%, the iShares Core S&P 500 ETF (IVV), are the best securities to access the best crowdsourcing tools when it comes to capturing stock sentiment. Performance has borne that out.
Chart courtesy of StockCharts.com
Newer ETFs have been moving away from the broad market for years, as the alpha-seekers purport all kind of ways to beat that boring old beta, and some of those funds certainly have accomplished that.
But when it comes to measuring broad sentiment and profiting from that, it is tough to beat the S&P 500.
At the time of writing, the author had no positions in the securities mentioned. Drew Voros can be reached at [email protected].