What is the BUZZ ETF?

Investments

The investment world is buzzing about today’s release of the new BUZZ ETF – a fund that might be a potential gamechanger in the way exchange traded funds are put together. 

The BUZZ ETF 

BUZZ is the ticker for the VanEck Social Sentiment ETF, a new fund debuting on the NYSE today. BUZZ will invest in 75 stocks that are receiving the most positive sentiment on the internet, cleverly using artificial intelligence to crawl the web for mentions and praise for the companies within. All companies listed in the ETF must have a market cap of at least $5bn. 

How does the AI work? The BUZZ Algorithm scans 15 million social media posts a month to measure which stocks have high positive investor sentiment across online social networks. Basically, it’s a social sentiment tracker. 

The impetus for basing funds around online popularity comes in the wake of the GameStop short squeeze and general rise of so-called meme stocks driven by social media chatter across the past couple of months. 

Meme stocks, like GameStop, AMC, and now Rocket Companies, have all been given massive attention thanks to online investor communities like the now infamous /r/Wallstreetbets turning their gaze and pushing stocks as potential investments. 

What is included in the BUZZ ETF? 

While it may have been birthed out of the meme stock craze, BUZZ will not contain such stocks. The $5bn minimum market cap precludes them from entry. Instead, the fund is full of many stocks that are already established multinationals. 

Stocks held in BUZZ include: 

  • Tesla 
  • Draft Kings 
  • Virgin Galactic 
  • Advanced Micro Devices 
  • Apple 
  • Ford 
  • Novavax 
  • Facebook 
  • Amazon 
  • Plug Power 
  • Twitter 

90% of the 75 companies in the ETF are split across five sectors: tech, consumer discretionary, communication services, health care, and industrials. 

Is there anything controversial about BUZZ? 

The involvement of Dave Portnoy, sports & pop culture website Barstool Sports owner and something of a figure head for millennial investors, owns a significant chunk of Buzz Holdings, the company behind the ETF.  

Portnoy has over 2.3 million Twitter followers, coming from the world of sports betting. When sports closed during the global lockdown in 2020. During that time, he turned his attention to day trading, and has been sharing his wins with his Twitter followers and YouTube subscribers daily. 

Because of his large social media network, and the fact ETF scans social posts for positive stock sentiment on its constituents, there is a possibility that if Portnoy talks up a stock, and such sentiment gets shared and talked about amongst his followers, than that stock would rise. It’s a similar principle to how places like /r/Wallstreetbets can send stocks to the moon through the power of social media. 

This may cause regulatory headaches and could also result in younger, inexperienced investors losing money. 

Portnoy said the algorithm was built five years ago. In 2020, the Buzz index outperformed the S&P 500 by 40%, he said. 

ETFs that seek to try something different are nothing new. Cathie Wood’s ARK ETFs, for example, are all about future technologies and innovation, based on what tech could disrupt everyday life from healthcare to transport and everything in between. 

What’s different about BUZZ though is its AI algorithm. While this tech has been tried before, notably in 2016 with the failed Sprott Buzz Social Media Insights ETF (ticker BUZ), the market was not responsive. 

But with meme stocks and social media appealing to a new generation of investors, maybe BUZZ could make its own market buzz once it goes live. 

BUZZ is due to go live on the New York Stock Exchange on March 4th 2021. Open your account to start trading or investing in the ETF has soon as it goes live. 

 

Stick or twist? Markets pin hopes on Fed chair Powell

Morning Note

Jay Powell, chairman of the Federal Reserve, speaks today at the WSJ’s Jobs Summit. We know the Fed’s policy on jobs already; what the market cares about is the central bank’s response to volatility in the bond market. This will be the last time we hear from Powell before the blackout period for Fed speakers ahead of the March 16-17th meeting.  

 

One option is for the Fed to embark on a third edition of Operation Twist, a policy that was last attempted in the wake of the last crisis. Twist simply refers to selling shorter dated government debt whilst simultaneously buying the same amount of longer-dated maturities. It attempts to control the yield curve by flattening it out – or ‘twisting’ it. It has the advantage of allowing the Fed to get a grip on both ends of the curve whilst not expanding its balance sheet. With the Fed committing to keeping short-term rates at zero for at least another couple of years, the effect on short-term rates should be small. Yesterday Philadelphia Federal Reserve president Patrick Harker stressed that rates won’t be rising in 2022, and that yield curve control is a tool in the Fed’s armoury. Lael Brainard hinted two days ago that the Fed is starting to pay attention to bond market volatility.

 

For the Fed it’s time to stick or twist. We know the RBA has started to blink, and ECB policymakers have been talking up how they won’t tolerate higher yields, albeit the messages have been a little mixed of late. The Fed has carried out Twist twice before – once in 1961 to strengthen the dollar, and again in 2011 during the sovereign debt crisis in Europe when rates were already at zero. The question is whether the Fed worries about the market stresses we are seeing, or whether it thinks the rise in yields is more about good economic news. The problem it has and has had for many years is that we are in world hooked on ultra-low rates so any move up reveals skeletons. 

 

Tech stocks are leading broader markets lower as a sell-off in government bonds picked up again. The yield on the 10-year US Treasury note rose to nearly 1.5% again and seems destined to nudge its way higher. US 5-year break even inflation expectations have risen to 250 bps, the highest since mid-2008. Yesterday the Nasdaq 100 cracked its 50-day moving average to close at 12,683, its weakest since the start of January. It’s now down for 2021 and is about 10% off its recent all-time high. The S&P 500 closed on a key trendline support at its 50-day SMA. It looks like it could be the moment for a crack – Powell could be make or break today. Tesla shares are down over 25% from their peaks. Cathie Wood’s main fund, the ARKK ETF, has shed 20% from its February high as the likes of Square, Zillow and Pinterest all tumbled in the region of 8%. Rocket Companies, which had become the next meme stock darling, fell out of orbit and crashed over 32% to $28.

 

After a decent day on Wednesday, European bourses took the cue from the decline on Wall Street that preceded a soft session in Asia as shares in Tokyo and Hong Kong both fell over 2%.  The FTSE 100 declined around three-quarters of a percent in the first hour of trade

 

Deliveroo has confirmed it will list in London and retain a dual class share structure. The timing is noteworthy since it comes a day after the Hill review. Deliveroo won’t be eligible for a premium listing – and the inclusion on FTSE indices that goes with it – but it soon will be.  

 

The review, which the chancellor endorsed in the Budget, calls for companies with dual class share structures to be able list in the premium listing segment, with some caveats to help protect investors, e.g. the dual class structure would be permitted for a maximum of 5 years and voting rights would be capped at a ratio of 20:1. It will also see the free float requirement lowered to 15% of available shares from the current 25%, and it will create a much easier regime for SPACs – blank cheque companies that are created with the aim of acquiring another business. Now the SPAC craze in the US may not be something we really want to emulate.  As Hill states, “listing on the premium listing segment of the FCA’s Official List has historically been globally recognised as a mark of quality for companies”, which begs the question of the merits of ‘watering down’ ‘the rules.

 

But the principle of evolving the listings rules for today’s markets, today’s technology, today’s investors, and the reality of Brexit, do make sense. For example, Hill notes that “it would be helpful if the FCA was also charged with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business”, as happens in other countries. It also makes recommendations to consider how technology can be used to improve retail investor involvement in corporate actions. These would clearly be positives.

 

Tech firms may be attracted to London as a result of the changes. Between 2015 and 2020, London accounted for only 5% of IPOs globally, in large down to the appeal of Asia and New York for tech firms. But equally it’s about the depth of the market and multiples – are we really able to raise the kind of investment into tech start-ups from London that US bankers can achieve for Silicon Valley?  

 

Elsewhere, OPEC failed to reach agreement yesterday and reconvene today. Chatter of OPEC and allies rolling over cuts has helped support prices after touching the weakest since mid Feb. Crude oil inventories rose by over 21m barrels, the most in nearly 40 years as the weather in southern US has shut in refineries. The build came amid a 13.6m draw in gasoline stocks, which was the largest since 1990. and a 9.7m draw in distillate stocks. 

 

Finally, some good news: JD Wetherspoon will open 394 pubs on April 12th for outside service in gardens and terraces. Opening hours are 9am-9pm. I expect demand will be high. Shares nudged higher after a solid gain following yesterday’s Budget announcement, which provided more business relief and support for hospitality.

 

Buzzy ETF set for launch as Rocket Companies blasts off, Budget Day looms for UK markets

Morning Note

If you thought the meme stock craze was going away, think again. VanEck Associates will this week launch a new exchange traded fund (ETF) that seeks to track the performance of the top 75 most buzzy companies on the internet. The VanEck Vectors Social Sentiment ETF (BUZZ) will track the BUZZ NextGen AI US Sentiment Leaders Index. This index consists of the most-favourably talked about stocks online, whether on blogs, social media or Reddit. The companies must have a market cap of at least $5bn.

 

Dave Portnoy, the meme stock pumper in chief who has attracted a huge following on Twitter, announced the launch yesterday by tweet. Portnoy is a part owner of the business (Buzz Holdings Inc) which licenses the index to VanEck.  

 

So how are these 75 stocks selected? The marketing bumf makes big claims about Artificial Intelligence and advanced learning models. It claims that the ETF will comprise the 75 large cap US stocks that show “the most positive investor sentiment according to our analytics models”. Pretty standard, but it continues: These stocks are selected and scored using “artificial intelligence”, including “machine learning” and “natural language processing algorithms, applied to millions of data points aggregated from social media, news, and blogs”. Wow, this sounds super clever, with AI it’s bound to work, right? 

 

Well perhaps, but also perhaps not. In the index guidelines document, under paragraph 1.6: Decision-Making Bodies, the owners say that “a committee composed of staff from Buzz Indexes Inc. is responsible for decisions regarding the composition of the BUZZ NextGen AI US Sentiment Leaders Index as well as any amendments to the rules”. So, there are clever AI algos at work, that I have no doubt, but the ETF doesn’t auto-rebalance based on that machine learning, it simply gives Portnoy and co some data to consider (or ignore, as they see fit) when deciding which of their meme stocks they want to pump add to their ETF. The Committee will also decide about the future composition of the index “if any Extraordinary Events should occur and the implementation of any necessary adjustments”.  Looks like it could be a very lumpy mixed bag of stocks with no correlation to each other except Reddit mentions. But as we have seen, on a short-term basis Reddit mentions is delivery alpha.

 

Case in point: Shares in online mortgage firm Rocket Companies (RKT) surged 71%  after it came in for the Reddit /r/wallstreetbets treatment. It seems heavy short interest (about 45% of the float) in the stock was exposed, driving a jump at the open and the dam burst once heavy open interest in $30 call options were triggered, fuelling another dealer gamma squeeze like we have seen with GameStop. Some traders had spotted some unusual options activity the day before coupled with a lot of comments on /r/wallstreetbets on RKT. Perhaps a scanner for this sort of thing is not a bad idea (our Sentiment tools suite has been doing this for years). It’s indicative of the fact this socially-driven trading is here to stay and will result in frequent unexplainable (on a fundamental/news basis) jumps in certain stocks.

 

Back to normality and it’s Budget Day here in the UK. No Glenfarclas for Rishi Sunak, only Coca-Cola imported from Mexico; at least according to a rather awkward conversation he had with a couple of school pupils that has been turned into a viral TikTok hit. A lot has been pre-announced (leaked), but we still expect the rabbit out of the hat moment – perhaps not immediate tax hikes, perhaps direct stimulus cheques for all (this works better than furlough) but that would be too much to ask. Sunak will display a total lack of imagination, Eat Out to Help Out mark II, for instance, more furlough and measures to stoke house prices, or the housing market, whatever way you look at it. Housebuilders are higher again today – if there is no extension of the stamp duty holiday they would pull back. Overall I think the market will like it as it will amount to more stimulus today, and despite the recent jump in yields I don’t feel the bond vigilantes are anything like strong enough to really take on gilts today.

 

Stocks moved higher in early trade, with the FTSE 100 testing 6,700, the Feb 25th high, and European markets also churning higher towards the top of recent ranges. The DAX struck a record high Frankfurt, boosted by recent comments from ECB members who have sought to push back against the rise in bond yields. Executive Board member Panetta yesterday voiced the ECB is having none of it: “The steepening in the nominal GDP-weighted yield curve we have been seeing is unwelcome and must be resisted. We should not hesitate to increase the volume of purchases and to spend the entire PEPP envelope or more if needed.” 

 

US stocks closed weaker on Tuesday as the tussle between bulls and bears continued following Monday’s jump. The S&P 500 is trapped in a range between 3,800 and 3,900 – a close above or below these levels will be important for the future direction of the market. Futures trade higher this morning. 

 

Whilst the Fed has tried stay relaxed about the recent jump in bond yields – which has stabilised this week – it’s clear they are far from ignoring the situation. Fed governor Lael Brainard said the recent surge had ‘caught her eye’. “I am paying close attention to market developments,” she said, adding that “some of those moves last week and the speed of the moves caught me “. Ms. Brainard said she would be concerned about any “disorderly conditions or persistent tightening” in financial conditions. 

 

OPEC and allies are faced with the usual tough decision on how to maintain the balancing act of too much supply vs too many output cuts. Yesterday there was no recommendation from the technical panel, but this is normal. OPEC is fairly bullish on demand and sees oil stocks dropping by about 4000m barrels in 2021. Crude prices are testing the mid-Feb lows ahead of the meeting; perhaps indicating some short-term fears that Russia will push for an even greater boost to production in the wake of prices stabilising. I’d expect the 23-nation OPEC+ group to agree to reduce 7m bpd of cuts by another 500,000 bpd from April and that Saudi Arabia will confirm the additional 1m which it removed from the market will return in April. Steep backwardation in the futures markets signals healthy deficit for producers to fill. 

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