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Social media sentiment ETF to launch in wake of Reddit rebellion

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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.”

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‘Digital big bang’ needed if UK fintech to compete, says review

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Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”



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Coinbase: digital marketing | Financial Times

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Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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US stocks make gains on Fed message of patience over monetary policy

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Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.



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