Social media is a gigantic store of information. But can tweets, likes and posts be used to pick stocks?
Although some analysts point to the need for caution, a number of funds have sprung up that seek to use social-media information to generate returns. Perhaps the clearest example of this trend is Sprott Buzz Social Media Insights ETF (ticker symbol BUZ), which was launched in April. BUZ tracks the Buzz Social Media Insights Index, which analyzes data from social-media comments, blog posts and news articles to identify 25 stocks about which the online community is most bullish.
The Buzz index uses an analytics model that deploys artificial intelligence and algorithms intended to understand the tone of a conversation—even including sarcasm. The index is reset every month, and a company must have a market cap of at least $5 billion to be included, though the stocks being talked about online tend to belong to the largest companies anyway, says Jamie Wise, the founder of Buzz Indexes.
The group knows best
BUZ’s managers won’t intervene, even if a stock appears in the index that they don’t personally rate.
“That collective group decision-making is better than any one individual’s ability to pick a stock, and so we’re not going to insert ourselves on top of that process,” says Mr. Wise.
The use of social-media data to inform investments is part of a broader trend toward exploiting big data, or very large sets of information that can be used to identify patterns or trends.
BlackRock Inc.’s Scientific Active Equity team uses big-data analysis in a number of its funds, says Jeff Shen, co-head of investments in the SAE Group and the head of emerging markets at the company. For example, individual investors dominate the Chinese stock market, and it can be difficult to figure out what they are thinking about, he says. The SAE group gathers information from the most popular social-media sites in the country in a bid to gain insight into a market that has been historically difficult to gauge.
“When there are a lot of people talking about one particular stock, it will probably give you a sense of the retail attention in that particular name or particular sector,” says Mr. Shen.
Vote bullish or bearish
Other funds seek to gather data directly. CrowdInvest Wisdom ETF (WIZE) tracks an index of 35 stocks that are selected every month based on data gathered from an iOS app. It can be thought of as Tinder (a location-based dating app) for investing, says CrowdInvest Chief Executive Annie Wyatt: Users rate stocks as bullish or bearish, and the most-favored stocks are placed into the index.
The app is based on “Wisdom of the Crowd” theory. Ms. Wyatt and her colleagues place no restrictions on who can download the app and vote, meaning a newcomer will be given the same power as an experienced long-term investor. The idea is that the group beats the wisdom of an individual.
“We want to make sure that people from all walks of life are coming into the app and voting and expressing their opinions, and we don’t ask for any reason why they’re expressing these opinions,” she says.
The potential of all that data is one of the attractions for investors when it comes to social-media companies themselves, says Jay Jacobs, director of research at Global X, whoseSocial Media Index ETF (SOCL) tracks the performance of the Solactive Social Media Total Return Index.
“There are a lot of different uses for that data, and it is a big component of revenues for these companies, so it should not be overlooked as an area of growth,” he says.
PureFunds ISE Big Data ETF (BIGD) aims to track the companies that are mining and analyzing the data. The fund was launched in July 2015, with the aim of tapping into the growing industry, say PureFunds CEO Andrew Chanin.
“I think people are going to become aware of how big this industry is.… If you’re watching the financial news, it is tough to go an hour without hearing companies promoting their big-data solutions or analysts talking about the space or companies in the space,” he says.
Critics weigh in
Still, the use of social-media data and big data more broadly has its critics. While social media can be an important source of information and can capture trends in the market, it will prompt most serious investors to carry out their own research, rather than relying on it directly for making an investment decision, says Neena Mishra, director of ETF Research at Zacks Investment Research.
“I don’t think these can supplant the human analyst, at least not in the near term,” she says. “True, machines can process and analyze data much quicker compared with humans, but the challenge lies in deciding the importance of each piece of information in the investment decision.”
Kiril Nikolaev, a financial analyst at ETFdb.com, also believes that while big-data analysis is increasingly important, it has potential drawbacks. For example, if everyone starts using the same or similar models to analyze information, the advantage will soon be “crowded out,” he says.
[Source:- The Wal Street Journal ]