There’s A ‘BUZ’ In The ETF Air

September 27, 2018

Social media is a great platform for noisemakers. But it can also be the perfect place to gauge investor sentiment and find good stock picks. That’s the premise, at least, behind some ETFs that sift through the social media noise to build portfolios based on online chatter.

The novel idea, on the surface, may seem more hype than viable as an investment strategy. But a look at a fund like the BUZZ U.S. Sentiment Leaders ETF (BUZ) shows that focusing on “what’s trending” can actually make for good returns, at least in the short term.

What’s The Buzz About

The fund is one of the innovators in the artificial intelligence (AI) space. BUZ tracks a proprietary index that, through AI, looks for the 75 most-talked about stocks online—those that people are bullish about.

The methodology centers on an algorithm that filters stocks being mentioned in articles, blogs and social media platforms, and then scores them on bullish sentiment and brand value, as well as the scope of the discussion surrounding them, according to our data. The “who is talking” about these stocks also plays a role in this process.

For this year, at least, BUZ’s performance suggests there’s wisdom in those crowds. The ETF, which is a U.S. total market equity strategy, has significantly outperformed market-cap-weighted, vanilla competitors such as the Vanguard Total Stock Market ETF (VTI) and the iShares Core S&P Total U.S. Stock Market ETF (ITOT). It’s also outperformed the SPDR S&P 500 ETF Trust (SPY):

 

Chart courtesy of StockCharts.com

 

Hardly Apples To Apples

Now, to compare BUZ to VTI or ITOT is hardly fair. We are talking about a portfolio of 75 algorithm-picked stocks that can represent no more than 3% of the mix individually, versus two ETFs each comprising nearly 3,500 stocks. It’s niche market access versus very, very broad market access.

Still, these ETFs all navigate the same U.S. total market equity waters, falling into a similar bucket of classification. In the end, performance all comes down to underlying holdings.

A lot of BUZ’s stellar performance in the past year has been linked to its hefty allocation to technology. The fund imposes caps on single-stock weightings, but it does not limit sector allocations, and technology represents about 40% of the overall portfolio.

Top holdings include companies that have been on a tear, like Netflix, up 110% in the past 12 months; Apple, up 47%; Amazon, up 112%. The single largest holding, Advance Micro Devices, is up 157% in the past year.

All of these strong performances have helped drive BUZ’s returns, as they represent a good chunk in a fund that has only 75 securities. (You can see what other ETFs own these stocks in our ETF Stock Finder Tool.)

The latest reconstitution of the portfolio for the month of September, announced Thursday, included the following securities:

 

BUZ Monthly Reconstitution

Source: Buzz Indexes, Sept. 27, 2018.

 

Niche & Its Risks

None of this is to suggest that BUZ is a certain bet. On the contrary, the fund is a narrowly focused niche-y bet on U.S. stocks.

It’s also a fund that reconstitutes every month, meaning the portfolio can dramatically change on a regular basis. In theory, with BUZ, you are always owning stocks investors are really bullish about. But then again, you are always betting that these investors know what they are talking about.

BUZ is a small ETF, with $11.5 million in total assets gathered over two years, trading less than $78,000 on average every day. And it costs 0.75% in expense ratio, which is a steep fee for a U.S. equity portfolio—that’s $75 per $10,000 invested, whereas VTI and ITOT cost $4 and $3 per $10,000, respectively.

But it’s an interesting little fund that exemplifies what niche investing can offer.

BUZ applies artificial intelligence to deliver in a passive ETF wrapper something that might otherwise require an active manager. And by crowdsourcing its stock picks—with the help of the machines—it’s essentially mitigating single-manager risk by relying on the “expert” opinion of the crowds instead.

In this case, it’s a niche approach that has been, thus far, delivering the goods.

Contact Cinthia Murphy at [email protected]

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