The Reddit rebellion might have died down for the moment, but New York asset manager VanEck is betting that there is long term value in listening to social media chat and is launching a social sentiment exchange traded fund.

The fund will invest in the stocks being most talked up on social media and appropriately enough, the company most likely to be sent “to the moon” by the new ETF is Virgin Galactic, Richard Branson’s space tourism company, currently the largest stock in the underlying index.

Despite the recent hype around social media, the VanEck Vectors Social Sentiment ETF is actually a revival of a previous fund that barely got off the ground.

Its underlying benchmark, the Buzz NextGen AI US Sentiment Leaders Index, previously fuelled the Sprott Buzz Social Media Insights ETF, launched in April 2016, which fell out of orbit in March 2019, having averaged $9m of assets during its lifetime.

“We are excited about it being back,” said Jamie Wise, chief executive of Periscope Capital, a Toronto-based hedge fund manager, which created the index.

Wise said the initial fund was closed after Toronto’s Sprott Asset Management withdrew as sponsor following a corporate realignment. On its own, Periscope “didn’t have the infrastructure for marketing [so] it didn’t organically attract assets”.

He is more optimistic about the reboot. “There is much more acceptance of the idea that there is a broad investment community out there and they do have interesting things to say. We were perhaps too early,” Wise added.

The Buzz index aggregates investment-related content from social media sites such as Twitter and StockTwits, blogs and news articles. Machine learning and artificial intelligence are then deployed to attempt to “identify patterns, trends and changing sentiment which can affect market-based outcomes”.

The 75 US large-cap stocks judged as having the highest degree of positive investor sentiment and bullish perception then form the portfolio, which is rebalanced monthly.

Wise, whose firm manages $1.2bn in long/short hedge funds, said he created the index because he “really wanted to know what people were saying [online] and thought there has to be some value in that.

“For many years and even generations we have known that sentiment drives markets. The problem was that we could never measure it,” he added.

During the Sprott ETF’s incarnation, the Buzz index outperformed the S&P 500 by about 10 percentage points, however since April last year it has taken off, surging by 130 per cent, well ahead of the 55 per cent gain of the broader index.

Line chart of Buzz NextGen AI US Sentiment Leaders index vs S&P 500 (rebased) showing To infinity... and beyond, or to the moon and back?

Wise attributed this, in part, to a broadening of the online conversation, with the number of posts available for analysis rising from about 2m a month originally to 50m, having doubled since the advent of Covid-19.

“We think the biggest thing that has led to that outperformance is how the conversation online has grown and evolved. The more people online, the more people engaged in talking about stocks, the more confidence and breadth in the security selection of the fund,” he said.

The past year has, however, been one where a lot of popular technology stocks have shot the lights out, and Facebook, Zoom Video, Apple, Amazon, Twitter and Tesla are all among the index’s current dozen largest holdings.

Wise argued this was only part of the story, though, with other significant contributors to Buzz’s outperformance including beaten up aircraft maker Boeing and cruise operator Carnival, after some online voices called the bottom in the shares in the wake of their post-Covid crashes.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, believed that “this time around could be different” in terms of attracting assets to the concept, “because we have seen the potential of social media and retail sentiment in helping drive the key themes in the market place”.

Nevertheless he warned of the potential for high turnover, given that “the [online] crowd moves quickly and hot money moving in is often hot money moving out”.

Typical monthly turnover is in the “mid to upper teens” of the 75 stocks, said Wise, with sentiment being measured over “weeks or months” to avoid the portfolio being driven by shorter term trends. For this reason Reddit is not a big driver of the Buzz index.

Ben Johnson, director of global ETF research at Morningstar, said it was “an interesting concept that is going to attract investors’ attention”, given that “thematic ETFs that have some sort of compelling narrative”, are driving a lot of investment flows, whether that narrative is “real or illusory”.

However, he feared the fund would be driven by the “worst kind” of momentum. Noting that Virgin Galactic was among a number of stocks that blasted higher after Ark investment Management filed to launch a space exploration ETF, he said “that had absolutely nothing to do with the fundamentals of the companies [or] the type of momentum strategy followed by serious investors”.

“Jumping on the social media sentiment bandwagon and letting that whip your portfolio around is effectively a high-octane momentum strategy and it’s a brand of momentum that’s about the worst kind, rather than more academic kind,” Johnson said. “I don’t want a brand of momentum that hasn’t been vetted and tested rigorously,” for instance by being adjusted for volatility.

Wise contested this view, saying that although he initially expected Buzz to be momentum-driven, in reality “it’s a mixture of momentum and value because some of the conversations are about whether an asset has become really cheap”.

Whatever the truth of that, Johnson was not optimistic that the VanEck ETF, expected to launch in the first week of March, will reach escape velocity.

“The first fund wasn’t long for this world and I don’t think that the next will be either,” he said. “The sponsor is trying to capitalise on a recent period of very attractive returns that are unlikely to be repeated in the future.”