Social Media ETFs: Time To Buy? - Top 5 Best Performing ETF's
November 17 2011 - 4:39AM
Zacks
Social media companies have become increasingly popular in
recent months as this corner of the market represents one of the
few growth opportunities left for developed market investors.
Internet usage continues to expand in both the U.S. and abroad
while an increasingly large share of that time is spent on social
media sites. In fact, according to recent research, only email and
search engine use make up a greater portion of “time online” than
social networking sites, suggesting that a huge market remains
relatively untapped by most. Meanwhile, thanks in part to this
trend, competitive moats continue to expand for firms such as
LinkedIn or others in the social networking space as the ‘network’
effect becomes ever harder for new entrants to overcome, making
this corner of the tech world a pretty juicy one for most
investors.
Thanks to this recent bump in interest, firms have begun to
lineup in order to help satisfy investor demand in the sector. The
recent launch of the E-TRACS Internet IPO ETN (EIPO) was a good
start for many as the product tracks an index of recently IPO’d
companies and offers heavy weightings in many social media firms
such as LinkedIn and Youku. Yet, the product also gives high
weights to Russian search engine giant Yandex, Bankrate, and even
OpenTable as well. This suggests that the product isn’t exactly a
great proxy for the social media sector and that others could come
in and offer investors more targeted exposure.
Due in part to the relatively untargeted nature of the product,
as well as investors’ traditional (but generally unfounded) fears
over ETNs and the credit risks associated with these notes, many
might be interested to note Global X and the company’s brand new
fund, the Social Media Index ETF (SOCL). The new product seeks to
track the Solactive Social Media Index which looks to track the
performance of companies involved in the social media industry,
including companies that provide social networking, file sharing,
and other web-based media applications.
While many investors may assume that this product is dominated
by companies such as LinkedIn or Groupon, which currently are among
the most popular U.S. firms in the field, the composition of the
product is actually very different. In fact, according to the
recent fact sheet for the product, American companies make up just
over 26.3% of total assets, putting the U.S. in second place in
terms of country exposure. Instead, the top weighting goes towards
Chinese securities at 36.9% thanks in large part to 10% weightings
for Tencent Sina Corp, and NetEase.com. Other top country
weightings go towards Japan (19.5%) and Russia (9.5%) while a
smattering of other nations make up the small remainder of the
fund.
This composition suggests that the fund may be more volatile
than some might have initially thought, especially considering that
American mainstays such as Google and Groupon combine to make up
just 9% of the total fund. Furthermore, investors should also
note that the product is relatively expensive—and no cheaper than
EIPO—with an expense ratio of 0.65% per year. Additionally, with
just 26 component securities, company-specific risk is still a very
real issue, especially considering that four securities make up
about 40% of the total fund’s assets.
In other words, while the social media sector may be an
interesting market for some investors, this ETF is by no means a
sure thing. The product has intense concentration issues and has
heavy exposure to often volatile emerging markets. This could meant
that even if social media takes off, a slowdown in markets such as
Russia or China could create a rough stretch for investors in this
product. Yet, with that being said, SOCL is really the best
options that investors have in the space, and is a far better
choice than EIPO for those seeking broad social media exposure. So,
those who are dead-set on buying up securities in this corner of
the market could do far worse than this brand new fund from Global
X, but most other investors, especially those with a longer time
horizon, would be better off waiting until more companies IPO in
the space and the holdings list fills out a little more.
(For more ETF & Mutual Fund news, check out the Zacks Fund
Page)
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