Not only is it a gimmick, but it enables you to follow the herd, which isn’t a good investment strategy in the first place It’s too simplistic to say Twitter is going to decide which stocks a new exchange traded fund will buy and sell. It’s close enough, however — plus sufficiently bizarre — that it serves as a reminder that the rapid expansion of ETF investments can expose investors to unusual ideas that may or may not be reasonable financial moves. To see why, let’s dive into the news that Market Prophit, which crunches social media data looking for trends, is seeking an adviser to create a mutual fund based on its “Social Media Sentiment Index,” a measure that started in May, tracking tweets that use a “cashtag,” meaning a ticker symbol preceded by a dollar sign. The Social Media Sentiment Index is made by monitoring the tweeting sentiment trends on stocks over a three-month period. The 25 most talked about stocks — from among issues traded on domestic stock exchanges with a market capitalization of $1 billion or more — are included for three months. Based on ongoing sentiment of about 250,000 Twitter TWTR, +0.00% users — with more people sounding off about investments every day — the chosen stocks are either bought or sold short in positions that are rebalanced based on tweeting trends every day. “You are crowdsourcing the investment selection based on sentiment, and you are weighting the portfolio based on market capitalization and sentiment risk,” said Igor Gonta, Market Prophit’s president.‘I would describe this as a gimmick, likely with no benefit to serious investors.’ Mark Salzinger, editor of The Investor’s ETF Report The initial public sentiment about the potential for a product based on the “wisdom of crowds” was mixed, with a curious few individuals liking an idea that experts mostly think is crazy, if only because “follow the herd” has never been the mantra for achieving superior investment returns. “I would describe this as a gimmick, likely with no benefit to serious investors,” said Mark Salzinger, editor of The Investor’s ETF Report. “One reason is that while many folks seem to think that stocks in the headlines outperform others, my recollection from financial economic research is that the reverse is true; stocks in the headlines, whether for good or bad reasons, tend to underperform stocks that are 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,” he added. “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.” There’s no denying that if Market Prophit goes ahead with the Twitter fund, the result will be all about emotion rather than balance sheet. If that works, however, and the fund can turn chatter into investing profits, investors will plunk down their money. “The proof is in the pudding,” said Stephen McKee, editor of the ETF Selections & Timing newsletter, who noted that every fund concept needs time to show itself as worthwhile or worthless. “On the surface, like most investment ideas, it sounds good, but may not actually work in real time. We’ll have to wait and see.” But even if the fund is able to generate superior returns, there’s a real question whether gimmicky issues ever fit in a well-built portfolio. No investor today has a hole in their portfolio that can only be filled by an actively managed fund cloaked as index fund based on what people are saying on Twitter. In fact, the fund will be hard to classify. The rules suggest it will be mostly large-cap domestic stocks, probably momentum plays; the Twitter component means it will hold stocks everyone is talking about, which Gonta expects to be a mix of recent hot initial-public offerings, big movers and, almost always, AppleAAPL, +1.83% and Alphabet GOOG, -2.38% While based on an index, the Twitter-based fund will follow what’s known as a “smart beta” strategy, industry-speak for an active-management process applied to an index concept. “I look at it as an active strategy, even though it’s index-based; it’s really a rules-based approach placed on an index,” said Tom Lydon, editor of ETF Trends. “A rules-based strategy keeps the manager honest. Everything that goes in or comes out moves for a reason, because it has met the criteria, but I’d think there will be enough moves in this portfolio so that it feels more actively managed than your typical index fund.” Under those circumstances, it can be hard for an investor to decide if something based on a straightforward mix is a good fit for a portfolio. Throw in a gimmick like Twitter sentiment and investors need to realize that fund and ETF firms bring new products to market first and foremost because they hope to attract a following. Investors, however, would be wise to consider whether gimmicky new funds have real long-term merit and an ability to improve a portfolio. Otherwise, all they’re getting for their money is a conversation piece. More from MarketWatch