Funds tracking stock markets turn to social media for insights

Social media has been extensively exploited to spark debate on important issues, but can the same platform be used to pick the favourite stocks? Lately, a number of funds have sprung up that use social media information to generate returns through the markets.

Sprott Buzz Social Media Insights ETF, which was launched in April, 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.

It uses an analytics model that deploys artificial intelligence and algorithms intended to understand the tone of a conversation—even sarcasm. The index is reset every month, and a company must have a market cap of at least $5 billion to be included. Though by trend, the stocks that are most talked about online are mostly of the largest companies, Jamie Wise, the founder of Buzz Indexes says.

The managers of the index do not intervene, even if they don’t personally rate any stock that appears in the index. “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,” Wise says.

The use of social media data to analyse stocks is part of the bigger trend of exploiting big data. 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. Shen reveals that social media analysis has given them valuable insight into difficult markets like China, where it is difficult to gauge the investor sentiment, as the stock market is dominated by individual investors.

Some funds, like CrowdInvest Wisdom ETF (WIZE), seek to gather data directly. The fund tracks an index of 35 stocks that are selected every month based on data gathered from an iOS app where 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. One doesn’t need to be an expert at stocks to vote; 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.

Still, the use of social-media data for analyzing stock markets has its critics, saying such information can never replace the importance of personal research, more so because the opinions online can be based on vague reasons.

“I don’t think these can supplant the human analyst, at least not in the near term,” Neena Mishra, director of ETF Research at Zacks Investment Research 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.