With A New ETF Controlled By Social Media Sentiment, Narratives Now Drive The Market

Finances alone once drove markets. That’s no longer the case.

This week, Barstool Sports founder Dave Portnoy announced the launch of VanEck’s Social Sentiment ETF — its appropriately styled ticker: BUZZ — an index fund investing in the top 75 large-cap stocks based upon whether there’s positive sentiment for those stocks on social media.

Financial performance originally informed a company’s online favorability, but now it’s the other way around. As we’ve seen with Reddit and r/WallStreetBets, online favorability can now inform a stock’s gains.

Leveraging cultural intelligence via alternative data sources to paint a more comprehensive picture of a business is strategic and a significant opportunity — as Portnoy’s ETFs will need do. But solely relying upon social sentiment is controversial.

For anyone familiar with consumer research or branding, social listening is a standard practice. There’s an entire industry of tools out there. By analyzing millions of social posts a brand can learn its current reputation or how its latest campaign changed its favorability. Television shows and politicians also employ this practice. Instantaneous snapshots of what the public is saying about you online is valuable to inform your next move.

How does it work? When a number of consumers begin using negative words along with your brand name, the software picks it up. You can even filter the data and visualize changes in sentiment by a social media poster’s age, gender or geography — and in real time too.

But what you gain in scale, you can lose in subtly.

Today’s most impressive AI is still sometimes faulty at determining language nuance, sarcasm, and irony, all literary devices frequently used on social media — and especially amongst young, male-skewing investors. Consider the fact that humans forever struggle with this interpretation.

For example, by analyzing the current social sentiment around the BUZZ ETF itself, a leading social sentiment tool determines “fucking moon” (a prevalent phrase) as negative... despite it actually meaning the complete opposite (ie. “this stock is going to continue rising until it reaches the moon”).

Investors should be aware that there are no details about the ETF’s natural language processing, making it impossible to know how it might categorize such a loaded phrase. A potential slip like the one above may determine whether or not a stock is bought, and whether or not an investor gains or loses money.

According to Jamie Wise, CEO of Buzz Holdings and the originator of the index, “We are using broad social media sources, principally Twitter and StockTwits.”

Beyond the AI’s accuracy, what’s also debatable are the sources themselves.

Firstly, as privacy and security concerns remain top of mind for social media users, platforms have begun better protecting their content, preventing third parties like social sentiment tools from crunching their data. The Cambridge Analytica scandal was a key driver here. Less and less content is being made publicly available to study. And as a result, a social sentiment tool is unable to scrape every single mention of a company across social media, only those made available.

Secondly, social media sentiment is not always a fair representation of the general public’s opinion. After all, you can only analyze social sentiment by those who elect to engage on Twitter and those who actively share their thoughts on a given company. This is a fraction of a fraction. While that’s the purpose of this ETF, it’s worth noting the selective sample here. Over half of Twitter users have no college degree, and 92% of U.S. tweets come from just 10% of users.

Portnoy’s ETF is onto something, but a more comprehensive cultural intelligence data set may consider top-down media sentiment; a larger, more representational sample; whether the poster is currently holding a stock or not; and online search volume for a stock. Each input can also be weighted accordingly. This stack is more complicated, but its robustness could decrease risk.

Fox Business and Portnoy confirm that “BUZZ isn't going to chase after volatile stocks like GameStop or AMC. Nor will the ETF try to manipulate the market.”

Unfortunately though, we have to split the hair between “try not” and “will not.”

If BUZZ continues to exclusively rely upon social sentiment, and Portnoy continues to discuss stocks with his 2.4 million followers on Twitter, then it’s possible that a feedback loop is spawned.

While it’s “collective sentiment” that’s being aggregated, an individual influential figure like Portnoy may still intentionally or unintentionally sway the collective that’s being analyzed.

“If BUZZ collects a few billion in assets, every single person making a social media post mentioning a ticker will understand that if they do it frequently and cleverly enough, they can get an index to pile on their trade,” says Dave Nadig, Chief Investment Officer and Director of Research of ETF Trends and ETF Database. “It becomes an index-algorithm vs. social-media-stock-chatter arms race.”

Coincidently on the day of BUZZ’s debut, #StockMarketCrash was trending on Twitter with the S&P 500 and Dow Jones Industrial Average both down. However, it’s difficult to determine which one came first.

Robert J. Shiller, the American economist and 2013 Nobel Laureate has been speaking about so-called narrative economics for quite some time.

“We need to incorporate the contagion of narratives into economic theory. Otherwise, we remain blind to a very real, very palpable, very important mechanism for economic change, as well as a crucial element for economic forecasting.”

Shiller was speaking to large-scale shifts and narratives, but in today’s culture of inequality and bottom-up revolts, it’s now possible to incorporate our own created stories.

Since Game Stop, the stock market narrative has taken a turn and with power in the hands of the collective, the following developments will be historic.

Buyer beware.