The FOMO fund: Yes, it’s a real thing and it could be dangerous

The FOMO exchange-traded fund is coming to the stock market. The strategy is about to be made easy, but that mightn’t be such a good thing.

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asx share price represented by cartoon letters spelling the word FOMO

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It appears the recent selloff in speculative sectors has done very little to spoil the appetite for risk for some. The fear-of-missing-out (FOMO) could be stronger than ever as we see a slight bounce back in tech shares and speculative investments like Bitcoin (CRYPTO: BTC) today.

So, have you ever felt like you are about to miss the boat on ‘the next big thing’? Well, fear not, the FOMO exchange-traded fund (ETF) may soon be listed on a US stock exchange. However, before you go FOMO into the fund, let’s take a look at what it will involve, and what risks come with it.   

Sentiment driving decisions

According to Bloomberg, FOMO will be an actively managed ETF – dabbling in everything from special-purpose acquisition vehicles (SPACs) to emerging companies of any market capitalisation.

The FOMO aspect is centred around how the fund selects its investments. Typically, an ETF would have its own criteria for investment selection that would include evaluation metrics, earnings growth rate, etc. However, this fund will employ its “proprietary tactical model” to make these decisions.

Effectively, the fund will look for investments that are ‘trending’ across different timeframes to capitalise on growing sentiment towards the asset.

Sentiment-based investments are not a new phenomenon. Many momentum investments are essentially playing on social sentiment, riding the trend upwards as people FOMO in. This is where the risk comes in. Sentiment changes, and it can change unforgivingly fast.

The danger of FOMO

There are a couple of areas of concern when looking at this type of fund. Firstly, investing based on emotion is a far cry from the tried-and-true principles of value investing. If the fund invests in assets where the sentiment has people fearing they’ll miss out, then the fund is being greedy when others are greedy.

This begs the question, will the fund be getting in on the bottom floor, or could it be entering at the top?

Secondly, the filing for the ETF notes its approach may result in a “high portfolio turnover rate”. What that really means is it will likely have high management fees. The issue with this is that the fund will have to perform exceptionally well in order to make the high fees worthwhile.

Otherwise, you’d be better off parking your wealth in a low-fee fund, such as Vanguard Australian Shares High Yield ETF (ASX: VHY).

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Mitchell Lawler owns shares of Bitcoin. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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