Twitter Inc (NYSE:TWTR) Index: Dangerous Gimmick or Profit Machine?

Twitter Inc (TWTR)

Twitter Inc ’s Sentiment Index could soon become an ETF. Market Prophit, a start-up, is in talks with a number of issuers to make an ETF out of an index it launched in May.

jack dorsey twitter inc TWTR

Twitter Sentiment to Decide Portfolio

The “Social Media Sentiment Index” tracks tweets that use a “cash tag,” which is a ticker with a dollar sign in front, such as $TWTR. The index is comprised of the 25 most-tweeted stocks, and is rebalanced daily.

An algorithm analyzes the stock tweets daily to determine whether investor sentiment is positive or negative. The stocks are also assigned a sentiment score that decides its weight in the index.

Currently, the index is made up of big names like Apple, Amazon and Microsoft. But smaller companies like Tesla and GoPro, which are popular on Twitter, also find a place.

“You are crowd sourcing the investment selection based on sentiment, and you are weighting the portfolio based on market capitalization and sentiment risk,” Igor Gonta, Market Prophit’s president, said.

The index is up almost 7 percent year-to-date, as depicted by the chart below. Quite good considering the S&P 500 is down close to 1.5 percent.


Can the ETF Provide Consistent Returns?

The average investor thinks the potential Twitter Inc  ETF could be a promising new product. Their optimism is based on the notion that stocks in the headlines tend to outperform.

But experts differ. Most in fact think it’s a crazy idea. How can the “wisdom of crowds” be the mantra for achieving superior investment returns? Deciding on a portfolio by “following the herd” is against one of the basic tenets of good investment strategy.

“I would describe this as a gimmick, likely with no benefit to serious investors,” Mark Salzinger, editor of The Investor’s ETF Report, says.

He goes on to add that his own research shows that ‘stocks in news,’ whether for good or bad reasons, are more likely to underperform those that lay under the radar.

“This is because stocks in the headlines get more attention from investors at large than is justified by the true value of the company in question. Bad news causes contrarian-minded folks to get in, thinking they are getting a bargain, while good news causes momentum folks to pile in. Neither investor is basing the decision on solid analysis of the fundamental value of the economy. Instead, their emotions get the better of them.”

Stephen McKee, editor of the ETF Selections & Timing newsletter, is however a bit more optimistic.

“The proof is in the pudding,” he says.

“On the surface, like most investment ideas, it sounds good. We’ll have to wait and see.”

Investors need to be cautious. Twitter Inc  is a great social networking tool. But can it be the basis for an investment strategy with real long-term merit?

Warren Buffet often says, “Be fearful when others are greedy, and greedy when others are fearful.”

Twitter Inc  ‘ETF’ would be an antithesis to this time-tested market maxim.

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