Index based on social media sentiment gives new weight to tweets

Index based on social media sentiment gives new weight to tweets
Tapping into the fear and greed of the crowd.
MAY 28, 2015
Investing based on the sentiment gleaned from 500 million daily tweets on Twitter Inc. might sound crazy, but the numbers appear to add up. Market Prophit, a market-sentiment research firm, has launched an index constructed and managed based on daily analysis of what people are saying about various stocks on Twitter. The Market Prophit Social Media Sentiment Index went live Monday, and the ultimate goal is to license it to an ETF provider, according to company founder and chief executive Igor Gonta. “It's a crowd-sourced index,” he said. “We know that people get emotional and that fear and greed fuel the market, but that sentiment has never been able to be captured as its own risk factor.” The index is constructed by measuring sentiment on Twitter, which has 302 million active monthly users, over a three-month basis. From there, the 25 most-talked-about stocks from the S&P 500 Index are selected to represent the index for the next 90 days. Once the index is established on a market-capitalization-weighted basis, Mr. Gonta said an algorithm is applied to daily sentiment for each stock in the index to determine long- or short-biased adjustments at the end of each trading day. “It works because it's based on a concept called the wisdom of the crowd,” he said. “It doesn't even have to be a large group providing the chatter, as long as it's a diverse group providing the chatter.” On a back-tested basis, from July 2013 through last Friday, the index generated a gross cumulative return of 52%, which compares to a 36% gain for the S&P over the same period. Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, said the closest thing he can think of to the Market Prophit index is the $157 million Guggenheim Insider Sentiment ETF (NFO), which invests based on the insider buying and selling activity of corporate executives. The 9-year-old ETF is up 3.7% since the start of the year, but it has had some very strong performance years, including a 36.1% gain in 2013 when the S&P gained 32.4%, a 26.8% gain in 2010 when the S&P gained 15%, and a 51% gain in 2009 when the S&P gained 26.5%. “Sentiment is not a widely used way of putting together an index, and thus an ETF would be a novel approach,” Mr. Rosenbluth said. The index is being promoted as a smart beta strategy, which fits a broad definition of mostly index strategies that are constructed or managed in ways other than just traditional market-cap weightings. While there isn't yet a licensing agreement in place to package the index as an ETF, Mr. Rosenbluth pointed out that all the moving parts could result in an expensive product when it is rolled out as an ETF. “It sounds like it will be a lot more to run than a traditional index,” he said. “The daily turnover, presumably, would be high, because sentiment can change rapidly.” Asked about whether the strategy could be easily manipulated by people trying to promote or degrade a specific security, Mr. Gonta said there are safeguards in place to look out for things such as multiple retweets or automated tweets. “Twitter is a public platform, and anybody can post what they want, but we have systems in place to prevent any gaming,” he said. “But Twitter is also a self-correcting platform, where the crowd does a lot of self-policing.”

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.