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Marrying Social Sentiment And Momentum Investing

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Among factor-based investment strategies, momentum is one of the easiest to understand. The cornerstone of momentum investing is the thesis that stocks that have performed well (or poorly) recently will, for better or worse, continue doing so.

Advisers and investors can add a new, potentially efficacious layer to momentum investing by using social sentiment. The idea of marrying momentum investing and social sentiment data is practical. Think about it this way: even if an investor is not an avid Twitter user, chances are she can guess a few stocks that are frequently trending in the social media space.

To this point in 2018, stocks receiving plenty of play across the Internet and social media outlets include, on the positive side, Amazon.com Inc. (AMZN) and Netflix, Inc. (NFLX). On the less-than-enthusiastic side of the ledger, General Electric Co. (GE) would be an example of a trending name. In all three cases, these can be considered momentum stocks. Positive momentum for Amazon and Netflix and deteriorating momentum for GE.

The power of human emotions is one reason why momentum investing and social sentiment is a notable combination.

“A good example would be the purchase of a pair of jeans – rarely do we really think logically on the technical specifications and its benefits associated with the processes or material technology that was used to make the said pair jeans,” according to Berkshire Media. “We rely on the perception of whether we would look good wearing it. And this perception relies on what others think about the product as well.  The premise of emotional decision that influences the purchases above also fuels the herd mentality associated with bulk selling of stocks in the stock market.”1

Social Sentiment Applications

Professional investors apply social sentiment data in myriad complex ways, but long-term investors can also derive benefits from studying social data.

“How people are talking about a new product or venture on Twitter, whether positive or negative, can help investors determine the potential long-term effects on the company’s share price,” notes U.S. News & World Report, citing Adela Quinones, news product manager at Bloomberg.2

As for the intersection of momentum and social sentiment, take a look at the following charts, the first measuring sentiment toward Amazon and the second doing the same for shares of Twitter Inc. (TWTR) on the StockTwits.com platform.

Whether these market participants realize it or not, they are applying momentum to social investing. Sentiment on StockTwits toward Amazon and Twitter is decidedly bullish even though the stocks are up 42.40% and 57.77%, respectively, year-to-date as of June 4th.

Related: A Buz-Worthy Social Sentiment Strategy

A Practical Approach  

Many advisers and investors do not have the technology or time to scour the social media landscape for mentions on thousands of publicly traded companies. The BUZZ US Sentiment Leaders ETF (BUZ) may ease that burden. BUZ follows the BUZZ NextGen AI US Sentiment Leaders Index, which uses big data technologies to find 75 stocks with the most bullish mentions across various Internet and social media outlets. As of June 4th, BUZ is outperforming the MSCI USA Momentum Index by more than 400 basis points on a year-to-date basis.

1 Source: Berkshire Media https://www.berkshiremedia.com.my/social-media-sentiment-and-the-stock-market/
2 Source: U.S. News May 14, 2018 https://money.usnews.com/investing/investing-101/articles/2018-05-14/how-investors-use-twitter-to-beef-up-returns
Disclosure:
This material must be preceded or accompanied by a prospectus. Please read it carefully before investing.
Standardized performance for the BUZZ US Sentiment Leaders ETF (BUZ) can be found here. Current holdings for BUZ can be found here.
INVESTMENT OBJECTIVE: The Fund seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index, the BUZZ NextGen AI US Sentiment Leaders Index (ticker symbol BUZZ) (the “Underlying Index”)
BUZZ US Sentiment Leaders ETF shares are not individually redeemable. Investors buy and sell shares of the BUZZ US Sentiment Leaders ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
The article references an indirect relationship between constituents in the fund and their relation to the cryptocurrency market. The portfolio does not represent an investment in cryptocurrencies. There are risks related to investing in cryptocurrencies. Please research carefully before investing.
The ability to invest based on social media analytics is relatively new and untested. The Fund may invest a significant portion of its assets in securities issued by companies in the information technology sector in order to track the Underlying index’s allocation to that sector.
These types of funds typically have a high portfolio turnover that could increase transaction costs and cause short-term capital gains to be realized.
The Fund is not suitable for all investors. There are risks involved with investing in ETFs including the loss of money. The Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund. Funds that emphasize investment in small/mid cap companies will generally experience grater price volatility. Diversification does not eliminate the risk of experiencing investment losses. ETFs are considered to have continuous liquidity because they allow for an individual to trade throughout the day.
Defined investment universe of US stocks – in order to be eligible for inclusion in the Underlying Index, a company’s stock must be traded on one or more major U.S. exchanges, have a minimum market capitalization of at least $5 billion, and have a 3 month minimum average daily trading volume of $1 million.
Investing in companies based on social media analytics involves the potential for market manipulation because social media posts may be made with an intent to inflate, or otherwise manipulate, the public perception of a stock or other investment.
Text and sentiment analysis of social media postings may prove inaccurate; that is, high positive sentiment may not correlate with negative change in the value of a company’s stock.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI nor APSD are affiliated with IRIS.
Social Sentiment- An indicator used to gauge investors opinions of different companies using their comments throughout the social media landscape.
Basis point- A unit of measurement to describe on hundredth of one percent.
BUZZ NextGen AI US Sentiment Leaders Index – identifies the 75 large cap US stocks which exhibit the highest degree of positive investor sentiment and bullish perception.
Russell 1000 Growth benchmark is composed of large and mid-capitalization U.S. equities that exhibit growth characteristics.
Solactive Social Media Total Return Index – The Solactive Social Media Index tracks the price movements in shares of companies which are active in the social media industry, including companies that provide social networking, file sharing, and other web-based media applications. A maximum of 50 components are included and weighted according to free float market capitalization. The index is calculated as a total return index in USD.
MSCI USA Momentum Index – The MSCI Momentum indices calculate a risk-adjusted price momentum score for each security in the MSCI Parent Index and select the top securities with the highest momentum scores.
One may not invest directly in an index.
Solactive Social Media Total Return Index – The Solactive Social Media Index tracks the price movements in shares of companies which are active in the social media industry, including companies that provide social networking, file sharing, and other web-based media applications. A maximum of 50 components are included and weighted according to free float market capitalization. The index is calculated as a total return index in USD.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
Past Performance is not indicative of future results.
ALPS Portfolio Solutions Distributor, Inc., a FINRA member firm, is the distributor for the BUZZ US Sentiment Leaders ETF. AAI is affiliated with ALPS Portfolio Solutions Distributor, Inc.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
BUZ000171 12/31/2018
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