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Fund News Advisors Can Use: AI-Powered ETF Sponsor Cautions Against an Overreliance on Sentiment

This week in fund news: Quant manager warns of the "disconnect" in sentiment investing, Wall Street warms to crypto, and Morningstar says ARK’s punching well above its weight.

The new VanEck Vectors Social Sentiment ETF (BUZZ) has been getting a lot of attention since its launch a few weeks ago. The ETF, promoted by internet celebrity and Barstool Sports founder Dave Portnoy, invests in U.S. large-cap stocks with the highest degree of positive social sentiment and bullish investor perception.

But Chris Natividad, co-founder and CIO of EquBot, an AI-powered ETF platform, cautions against an overreliance on social sentiment as an investment signal. EquBot’s equity ETF uses IBM Corp.’s Watson artificial intelligence technology to pick several dozen stocks with the potential to beat the market. It analyzes up to 10 years of data on thousands of stocks, including market sentiment, regulatory filings, news articles and social media posts. But Natividad says there are several misconceptions around social sentiment investing, including a timing disconnect.

“‘Sentiment scores’ can be misleading as every coin has two sides,” he said in a statement. “What is represented as a positive event for one group may signal disaster for other market participants. To expect algorithms relying solely on these sentiment scores to get the direction of the trade and the projected impact consistently correct is to expect too much.

“Certain sentiment scores have a ‘stickiness’, while others can shift by the hour. The who, what, where, when and how of the data being used can shape the probability of future price appreciation. Just as funds can focus on technology, or capitalization size, we view sentiment-driven funds as another such filter, a filter that can significantly underperform like other single-factor approaches over time.”

The BUZZ ETF has already gathered more than $500 million in assets, according to published reports, pointing to a shift in the way investors perceive brand new ETFs. It used to be that ETF investors would shy away from new funds, looking instead for scale, a track record and wide distribution, according to Bloomberg. But that’s changing. “Suddenly, newcomers are luring big chunks of cash from the outset with exchange-traded funds built to surf the trends beloved by the day-trading masses,” Bloomberg says.

BUZZ announced its first rebalance this week, bringing in 11 new stocks and removing 11 stocks based on investor sentiment. Some of the new stocks include Costco, Verizon and Dropbox, while stocks that got booted include BlackRock, Visa and Starbucks.

Wall Street Warms Up to Cryptos

The wirehouses have primarily steered clear of cryptocurrencies—with many not allowing advisors to recommend the products to clients. But that trend may be reversing. Bloomberg reported this week that Morgan Stanley will offer wealthy clients access to three funds that enable ownership of Bitcoin. Galaxy Digital runs two of the funds, and the third is overseen by FS Investments and NYDIG, according to Bloomberg.

Only wealthy clients with “an aggressive risk tolerance” and at least $2 million held by the New York-based firm will have access to the funds.

Meanwhile, asset management firms are racing to win approval for the first Bitcoin fund, Bloomberg reports. At least four firms now have live applications for an ETF tracking the largest cryptocurrency, with WisdomTree Investments joining their ranks late last week. VanEck Associates Corp., NYDIG Asset Management and Valkyrie Digital Assets were the names already in the running. This is not the first time asset managers have claimed to be on the cusp of SEC approval for crypto funds, however, only to see the commission send them back to the drawing board.

Morningstar: ARK’s Punching Well Above Its Weight

ARK ETF Trust has pulled in over $36 billion in new assets over the trailing 12 months, a 1,024% organic growth rate, according to new fund flow data from Morningstar. The fund family, run by Cathie Wood, took in $8 billion in February alone, the fifth highest total of any fund family.

But the research shop says ARK is punching well above its weight, with just seven total funds and $51 billion in total assets. “It may be more difficult for the shop to repeat its success with a significantly larger asset base,” Morningstar said, in its report.

Overall, long-term mutual funds and ETFs took in a record $144 billion for the month of February, the largest since January 2018, when flows were $132 billion.

U.S. equity funds brought in more than $37 billion during the month, but these funds experienced outflows of more than $199 billion for the last 12 months. Money has been flowing into categories that may weather an inflationary environment, such as commodities broad basket and inflation-protected bonds.

T. Rowe’s First Impact Fund

T. Rowe Price has launched its first impact fund focused on the global environment and social equity issues. The actively managed T. Rowe Price Global Impact Equity Fund will look for companies having a positive impact on the climate and resources, social equity and quality of life and sustainable innovation. It will exclude companies that don’t meet its impact mandate, including fossil fuels, tobacco, gaming, and for-profit prisons.

It will be managed by Hari Balkrishna, and it will have a net expense ratio of 79 basis points and a minimum of $1 million for I shares.

Hartford Bets on Longevity

The Hartford Funds has launched a new ETF that seeks to capitalize on the growth of the aging population and the buying power of this population. The Hartford Longevity Economy ETF (HLGE) will invest in sectors that should benefit from longevity, including communication services, health care and information technology. 

“HLGE is designed to invest in companies included within industries that provide goods and services that reflect longevity economy themes, including aging in place and home modification, working longer, performance health and comfort, maintaining social connections, financial freedom, staying mobile, human enhancement and leisure, and entertainment,” Hartford says. It has an expense ratio of 44 basis points.

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