Want to get in on the meme stock drama without having to monitor forums like WallStreetBets? Well, now there’s a way.
Introducing the BUZZ ETF. This ETF was created by investment firm VanEck and tracks the BUZZ Index, which uses artificial intelligence to select the 75 large-cap meme stocks that are generating the most “buzz” on social media. Hence how the ETF got its ticker symbol BUZZ.
If your FOMO is at an all-time high right now because you aren’t sure how you can get in early on the next popular stock, investing in this new ETF could offer you a solution. To help you decide whether the BUZZ ETF is a good addition to your portfolio, we’re going to break down what exactly a meme stock is, what criteria the BUZZ Index uses to select its holdings, and what the pros and cons of investing in this ETF are.
What is a Meme Stock?
A meme stock is a stock that gets hyped up on social media, which causes an increase in the stock’s trading volume. Basically, people start hearing about the stock on platforms like Twitter and Reddit, so they go and buy it. The sudden hype and subsequent market transactions cause the stock’s price to go up, often to well above market value.
How the BUZZ Index Selects Stocks
The index uses AI to search social sites, blogs, and other platforms and find the companies generating the most discussion on the web. It then looks for which companies in that dialogue have the most positive and bullish social sentiment. During these searches, the algorithm doesn’t only focus on talk of the company’s stock, business dealings, or financials but looks at everything from how people feel about a recent ad, to the reviews people are giving on a new product. It then forms an index of the top 75 scoring companies with a market cap of $5 billion+.
The index’s list of holdings is reviewed every month and updated as necessary. However, to cut down on transaction costs, if a company ranks in the top 75 one month and then moves slightly outside of this range the next month, say to 80th place, the algorithm will keep the company in the index and review it again in the next period.
Because of the month-long wait period between evaluations, the creators of the BUZZ Index say that short-term blips in stock prices, like we saw with GameStop, won’t affect the index. GameStop isn’t part of the fund’s holdings, mostly because its market cap was well below the $5 billion threshold when the short squeeze happened, but also because of how short-term its popularity was. Stocks that are extremely volatile for a very short period will most likely not make it into the index.
Should You Invest in the BUZZ ETF?
Pros
- Young people are increasingly using social media platforms, blogs, and other alternate sources for information over more well-established news outlets. Platforms like Twitter, TikTok, and Reddit now have real power in shifting a company’s public perception and influencing the price of its stock. Since those sources are having a tangible effect on stock prices but aren’t considered in the traditional evaluation process for index holdings, investors in this ETF could see gains from information that would have been missed during a typical evaluation of a company’s financial statements.
- Social media is playing an increasingly large role in a company’s marketing strategy. Companies that utilize social media well could have the upper hand against their competitors in terms of revenue growth. This index should pick up on the companies with good social media strategies, and investors could see better long-term results from the predictions the algorithm makes based on social media chatter.
- By focusing on more stable, large-cap companies, the index reduces the risk a typical meme stock investor faces. Most of the companies we’ve seen pop up in the WallStreetBets saga would have been screened out by the index for having a market cap below the $5 billion threshold. They also only experienced brief peaks in their stock prices before they plummeted back to more normal levels. Based on this fund’s criteria, short-term fads like this most likely won’t impact BUZZ investors’ portfolios.
Cons
- While there is a month-long waiting period between evaluations to screen out super fast fads, there’s still a high potential for frequent fluctuations in the fund’s holdings, which isn’t ideal for the long-term investors who usually buy ETFs. If the index’s holdings fluctuate dramatically, investors may not be able to capture any real growth and will instead just be stuck holding that month’s most popular overvalued companies.
- Consumer sentiment doesn’t equal sound financials. At the end of the day, investing is about making money. It doesn’t matter how much you cheer a company on. If they don’t have a solid financial foundation something like the coronavirus can come along and knock them down, leaving you with little money.
- Basing the fund’s holdings off of hype, which often inflates a company’s stock price, means that you could just end up paying more for the shares you’re buying than they’re worth. It’s like walking into a store and seeing shoes for $100 and offering the cashier $150 for them. You’d never do that with shoes, and you shouldn’t do that with stocks either.
- None of the behind-the-scenes companies will make it into the index because consumers don’t know their names and therefore won’t be hyping them up on social media. A good example of this is Tennant, the company I used to work for. They make industrial floor cleaners that I now notice everywhere. At airports, Home Depots, even at a train station in Italy. Large companies like this that are responsible for the inner workings of the brands we know will be missed by this index.
- This has been done before. There was another social sentiment ETF that started in 2016 and ended after just 3 years.
- The expense ratio is relatively high at .75%.
The Verdict
If you aren’t super concerned about what’s been happening with GameStop, AMC, and Nokia, I say skip the BUZZ ETF. The expense ratio is fairly high, and the last attempt at an ETF like this didn’t work out. If you’re getting FOMO and think investing in this ETF could help you capture some earnings from meme stocks, try it out. Only time will tell how this ETF will perform, and since it just launched in March of 2021, we’ll have to wait to see how it all plays out.